Employees Say They Cannot Afford to Save for Retirement

The Federal Reserve’s 2015 Survey of Household Economics and Decisionmaking asks respondents whose employer offers a plan, but who do not participate, why they do not invest through the plan. The most common reason, stated by 27% of these respondents, is an inability to afford contributions to the plan.

This was followed by those who prefer to save for retirement in other ways (20%), those who are unsure of the best way to invest contributions (18%), those who are not eligible for their employer’s plan (18%), and those who plan to invest but have not yet signed up (16%).

Smaller fractions reported that they simply prefer to spend the money rather than save, that their employer does not match contributions, or that they do not invest for other reasons.

The survey found differences between men and women when it comes to reasons for not investing through their employer’s retirement plan. Among women who indicate that their employer offers a plan but that they do not participate, 31% report that they are unable to afford contributions to the plan, and 26% say they are not eligible to participate in the plan. This compares to 22% and 9% among men who do not participate in their employer’s plan citing these reasons, respectively.

Looking at those respondents who do have self-directed retirement savings (including 401(k), 403(b), IRA, and savings outside retirement accounts), the survey reveals 49% are either “not confident” or only “slightly confident” in their ability to make the right investment decisions when investing money in these accounts. The remaining 51% are either “very confident” or “mostly confident” in their investment abilities.

Forty percent of respondents who have self-directed retirement savings indicate that they receive professional financial advice, either from a financial planner, a lawyer, or an investment broker. Twenty-eight percent use financial advice received from friends or family; 24% use advice obtained from the Internet, books, or magazines; and 11% use advice received from their employer. Just more than one-quarter of respondents, however, indicate that do not use any financial advice when deciding how to manage their investments.

Among those who do not use any financial advice, 47% indicate it is because they do not feel that they need help with their investments, but just more than half report that they either cannot afford financial assistance (27%) or that they would like help but do not know where to go to get it (25%).

According to the Federal Reserve survey, 31% of non-retired adults report that they have no retirement savings or pension whatsoever, unchanged from 2014.

The patterns of retirement savings differ substantially—and not surprisingly—by age. The percentage of people indicating that they lack retirement savings decreases with age. Nearly half of those ages 18 to 29 report that they have no retirement savings or pension, whereas approximately three-quarters of non-retirees ages 45 or older have at least some savings.

Whether respondents have retirement savings as they approach retirement is highly dependent on their employment status. Nearly 90% of employed respondents ages 45 or older have retirement savings.

The lack of retirement savings is particularly acute for respondents with limited incomes and for racial and ethnic minorities. Sixty percent of non-Hispanic black respondents and 57% of Hispanic respondents have at least some retirement savings, compared to 74% of non-Hispanic white respondents. Looking at retirement savings by income, 94% of respondents with a family income more than $100,000 report that they have at least some retirement savings, and 82% of those making between $40,000 and $100,000 per year have some retirement savings. Among respondents making less than $40,000 per year, 44% have retirement savings.

The most commonly reported form of retirement savings is a defined contribution plan, such as a 401(k) or 403(b) plan, which 48% of non-retirees possess. This is nearly twice the 25% of non-retirees who participate in a traditional defined benefit pension plan through an employer. Twenty-seven percent of respondents report they have an individual retirement account (IRA), and 41% indicate they have savings outside of a formal retirement account.

Additionally, 15 percent of respondents report having real estate or land that they plan to sell or rent to generate income during retirement, and 6% report having retirement savings through the ownership of a business.

According to the survey, 4% of those with retirement savings report that they borrowed money from a retirement account during the year before the survey. In addition, 4% report that they cashed out (permanently withdrew) some or all of their retirement savings in the prior 12 months, and 1% indicate they both borrowed money from and cashed out retirement accounts in that time.

Additionally, 5% of non-retirees without retirement savings say they borrowed from and/or cashed out their retirement savings, reflecting that some individuals previously had savings but have depleted the funds in those accounts.

The survey asked respondents about the sources of income they plan to use to pay for expenses in retirement. There are differences by age in the sources of funds that respondents expect to use to pay for retirement expenses.

This is especially apparent with respect to Social Security. Forty-two percent of those younger than age 30 say they anticipate that Social Security benefits will be part of their plan to pay for expenses in retirement. This percentage steadily increases by age cohort, with up to 91% of those ages 60 or older expecting to receive Social Security income in retirement.

Similarly, traditional defined benefit pension plans are less common as an expected source of retirement funding among younger respondents. Thirty-six percent of those ages 60 and older are counting on income from a defined benefit pension, while 23% of those ages 18 to 29 plan on receiving income from a defined benefit pension.

Just more than half of respondents expect to draw on a 401(k) account in retirement, 44% of respondents plan to rely on savings they hold outside formal retirement accounts to cover their expenses, and 32% plan to use savings in an IRA.

Eighteen percent expect to sell or rent land or real estate to pay for retirement expenses. However, many non-retirees also expect continued employment to be a significant source of retirement income, with 38% of all respondents expecting to continue working in some capacity to cover their expenses, and 22% expecting their spouse or partner to continue working.