Americans Are Worried About Retirement Savings, And They Should Be

This week is America Saves Week, a time to focus on actions Americans can take to successfully save. When it comes to saving for retirement, Americans are feeling pessimistic.

In a recent nationwide survey of working age Americans, 79% agree that the nation faces a retirement savings crisis, up from 67% in 2020. And more than half of Americans (55%) are concerned that they cannot achieve financial security in retirement.

But is this worry about retirement savings warranted? After all, people worry about many things, and some worries are not necessarily justified. For example, up to 40% of Americans say they are worried about flying. But data show that aviation is the safest mode of transportation, and travelers are far more likely to get into a car accident on the way to the airport than to have any kind of serious trouble on a flight.

When it comes to retirement, the data indicate that Americans’ worries indeed are justified. The reality is that retirement security is out of reach for far too many Americans. Most Americans, particularly middle-class workers, are falling far short when it comes to saving enough money for a financially secure retirement. According to the National Retirement Risk Index, half of U.S. households will not be able to maintain their standard of living when they retire even if they were to work until age 65 and annuitize all their financial assets.

A Grim Outlook For the Generation X

Take for example Generation X, the generation that quickly is approaching retirement age and was the first generation to mostly enter the workforce following the shift from defined benefit (DB) pensions to 401(k)s and other defined contribution (DC) plans in the private sector. For Gen Xers (those born between 1965 and 1980), the bottom half of earners have only a few thousand dollars saved for retirement. While the typical Gen X household has an average savings of more than $243,000, the median household has only $40,000 in retirement savings.

This means the vast majority of Gen Xers are not even close to having enough savings to retire, which isn’t surprising given the terrible retirement hand that has been dealt to the latchkey generation. Most Gen Xers don’t have a pension plan, they’ve lived through multiple economic crises, and wage growth lagged for many years during their careers.

There’s a Multitude of Challenges That Make Preparing for Retirement Difficult

Another big part of the problem when it comes to saving for retirement is that savings plans are not universally available in the U.S. Almost half of private sector employees ages 18 to 64, or 57 million Americans, do not have the option to save for retirement at work. This is important because a wide body of research finds that payroll deduction is the key to helping households build retirement savings and establish retirement security.

And saving for retirement is only becoming more difficult as Americans deal with rising costs. Escalating housing, healthcare, and long-term care costs in retirement are creating financial obstacles for many Americans. A recent report found that the number of Americans age 65 and older who are cost-burdened by housing costs has increased, rising healthcare costs are higher for older Americans who are more likely to have multiple chronic health conditions, and long-term care costs represent an increasing challenge for many older Americans as more senior citizens need long-term care every year.

Our recent nationwide retirement poll found that Americans indeed are worried about these rising costs. When it comes to inflation, 73% of respondents said recent inflation has them more concerned about retirement. And 87% of respondents said they are concerned generally about rising costs, while 80% are worried about the rising cost of long-term nursing care.

America’s Savings-Based Systems Require Too Much of Individuals

It’s important to remember that individualized 401(k) savings plans were never intended to replace pensions – they were meant to be a supplemental savings vehicle. We’re expecting 401(k)s to do a job they weren’t designed for. Moreover, all the risk is shifted onto employees. Also, individualized system requires a great deal of financial knowledge and significant effort by employees from the start of their career and throughout their life.

For an individual to plan for their retirement, one must estimate the needed income, convert to a dollar amount, and plan a savings rate to hit that amount. Additionally, post-retirement years can bring the biggest inefficiencies, as retirees must ensure they spend down their nest egg at the right rate so it doesn’t run out.

As detailed in the new public opinion research report, Americans were asked how much retirement income they believed they could get from $100,000 of savings at retirement. The responses were alarming.

If one applies the four percent rule, a $100,000 nest egg would produce about $4,000 of income in the first year of retirement and then increased by inflation each subsequent year. But the research finds that only 8% of respondents correctly indicated that $100,000 in savings would generate $3,000 to $4,999 annually in income throughout their retirement starting at age 67.

Most respondents wildly overestimated the amount of income that could be produced from that $100,000 nest egg — 19% indicated that sum would produce $25,000 or more while 21% thought it would generate $10,000 – $14,999 in annual income through retirement. This data suggests that Americans largely are unaware of how much they need to save to produce a desired level of retirement income.

Policy Changes Can Help Improve Retirement Savings Outcomes

Fortunately, lawmakers are looking at ways to address the retirement savings crisis. Congress passed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) in 2019, which changed a number of retirement account rules, including expanding access to long-term, part-time workers and offering tax credits to help small businesses establish their own retirement plans.

And in late 2022, the SECURE 2.0 Retirement Savings Act was signed into law, expanding the SECURE Act of 2019 to further strengthen the retirement system by incentivizing employers to offer a plan and expanding auto-enrollment and raising catch-up contribution limits. SECURE 2.0 also reformed the federal Saver’s Credit, making it a Saver’s Match, which is refundable and deposited directly into the savings plans of low-income workers. Meanwhile, some 19 states have enacted legislation in recent years establishing new state-facilitated retirement programs for private sector workers who lack retirement plans through their employer.

But until policymakers solve the problem of universal access to cost-efficient retirement plans and defined contribution plans offer effective post-retirement support, too many Americans will continue to struggle with amassing adequate retirement savings to maintain their standard of living in retirement. And the lack of a federal social insurance program similar to Social Security for financing Americans’ long-term care costs will put many at financial risk in their elder years. The good news is that the nation indeed has recognized the retirement savings crisis and is taking steps in the right direction to find pragmatic solutions.