According to a new report, 45% of American households are expected to run out of money in retirement. But this shortage is not the same across all households. In fact, younger generations may be better prepared for retirement than their parents.
This is the result of Morningstar’s new Model of US Retirement Outcomes, a tool that assesses how well employees are financially prepared for their retirement. To demonstrate how this works, the Morningstar Center for Retirement & Policy Studies analyzed how likely different groups of employees in the US are to have sufficient financial resources in retirement today.
There are some surprising and not so surprising results. On the less surprising side, Morningstar found that those who participate in an employer-sponsored defined contribution (DC) retirement plan – such as a 401(k) – are much less likely to have a savings deficit in retirement than those without such a plan. In fact, those who used such a plan for their retirement savings had, on average, four times higher account balances than those who did not use such a plan.
As for the report’s more unexpected findings, the most important is that younger generations appear to be in a better position than older ones, the study shows. Despite the widespread claim that millennials will never be able to afford retirement, Morningstar reports that 47% of Generation X and 52% of baby boomers could face retirement shortfalls, compared to 37% of Generation Z and 44% of millennials.
That’s largely because young Baby Boomers and Generation X were at the forefront of moving away from pension plans and toward self-funded retirement savings. That means they had less time than younger generations to save money themselves—and had less access to high-quality investment information early in their careers.
Morningstar’s study is not the first to note this disparity, and there are other changes in the retirement landscape that have helped younger generations save more. Target-date funds, managed accounts, auto-enrollment and auto-increase, for example, have only recently become widely available.
“Even within these two generations, there are discrepancies, as baby boomers tended to experience the early phase of the transition, when the understanding of how to use a DC plan was not as developed as it is today,” the report said.
Need more proof that the shift to private savings is hurting workers’ retirements? The report also finds that public sector workers are actually the best prepared for retirement. Morningstar predicts that about 29% of them will experience a shortfall. This is also the sector most likely to still offer its employees a defined benefit plan such as a pension.
However, Morningstar’s study assumes that Social Security payments will not change – which is not 100 percent guaranteed in the current U.S. political environment. As the report notes, the program moves closer to insolvency every year, which could severely damage the retirement prospects of most generations.
Finally, the report also finds that lower-income savers, Hispanic or African American savers, and single women are much more likely to run out of money in retirement. Morningstar calls for a number of policy changes to improve the situation, including making workplace retirement plans available to more Americans (especially those with low incomes) and advocating for the Saver’s Match, a provision of the SECURE Act 2.0 of 2022 designed to help low-income families.
