Ideal Retirement Age of 65 Out of Reach for 45% of Savers

Morningstar Inc.’s retirement group has added to the ongoing dialogue around a retirement savings shortfall for many Americans with a study based on a new retirement savings simulation tool.

According to the investment and retirement services provider, about 45% of Americans will run short of money in retirement if they retire at the traditional age of 65. That scenario is starkest for those in the private sector, where company-sponsored retirement plans are less prevalent, according to the findings; by comparison, only 29% of public-sector workers are forecast to face similar savings shortfalls.

“Indeed, the public sector is the industry with the highest likelihood of a worker having access to a retirement plan,” Morningstar’s researchers wrote in the report. “Second, the results were better for industries wherein DB plans are more common. Again, the public sector stood out in this regard, as did the manufacturing sector and miscellaneous services sector.”

Morningstar’s findings point, overall, to the need for Americans to save more and for longer in tax-deferred savings programs, with results improving dramatically for people able to take that path.

The report is based on a new tool developed by Morningstar to be used by its research center, that considers “individual characteristics, healthcare costs and projected longevity to assess retirement income sufficiency.” The model draws in part on Morningstar’s proprietary data, including participant data from about 1,000 defined contribution plans. It also uses publicly provided databases for its analysis including the Federal Reserve Board’s Survey of Consumer Finances, the University of Michigan’s Health and Retirement Study and Consumption and Activities Mail Survey.

The researchers are also using the model to “simulate 1,000 retirement outcomes, which entails projecting all kinds of variables, such as savings rates, investment returns, retirement expenses, and health states (certain health states have associated long-term services and supports costs),” Spencer Look, associate director for the Morningstar Center for Retirement & Policy Studies, explains by email.

Delay If You Can

According to the report, if Social Security remains as it is today, delaying retirement to 67 will reduce those with a retirement savings shortfall to 38% of the population; if claiming Social Security is delayed to age 70, that drops lower, to 28% of the surveyed group.

Meanwhile, among the generations, baby boomers and Generation X are most likely to experience retirement shortfalls, according to the report.

About 47% of Generation Xers and 52% of baby boomers “may experience retirement shortfalls” as compared to 37% for Generation Z and 44% for Millennials. Part of those findings are related to the amount of time people have to save, along with being amid the heart of the “transition from a DB-dominant system to a DC-dominant system,” the researchers wrote.

For those still in their working years—Generation Z, Millennials, and Generation X—if they are not participating in a qualified retirement plan, their retirement funding ratios (projected income versus projected expenses) take a dive. Morningstar’s report shows that 57% of people not participating in a DC plan may run short of money in the future, as compared to just 21% for those slated to contribute to a plan for 20 or more years.

“There is a retirement crisis …. for those who do not or are unable to participate in a defined-contribution plan,” the researchers conclude.

The report also details data showing that lower-income workers are more susceptible to lacking enough savings for retirement, and that Hispanic and Black Americans are in worse shape for retirement.

According to the findings, 61% of Hispanic Americans and 59% of non-Hispanic Black Americans are projected to run short of money in their later years, compared to 40% for both non-Hispanic other Americans and non-Hispanic white Americans. The disparity is “largely a function of the racial wealth gap, specifically the disparities in retirement account balances,” according to the report.

Crisis Or Challenge?

Morningstar laid out its findings in a report titled: “Beyond the Retirement Crisis Headlines: Why Employer-Sponsored Plans Are the Key to Retirement Adequacy for Today’s Workers.”

That “retirement crisis” language aligns with a rallying cry heard from others in the financial service space recently, including BlackRock’s Larry Fink writing in his annual report in March that the U.S. should consider a “retirement rethink.”

Other voices in the retirement space are pushing for more nuanced language. In a report published earlier in July, PGIM noted that while many people may feel there is a retirement crisis, their savings often do not paint as dire a picture.

“While I understand the perspectives and obstacles Americans face when it comes to saving for retirement, I prefer to think of the current state as a challenge, not a crisis,” David Blanchett, PGIM’s DC solutions head of retirement research and portfolio management, wrote in the report. “Access issues notwithstanding, our retirement system is one of the best in the world, and we’re making changes to increase availability of workplace retirement plans and improve behaviors among employees participating in the plan to ensure they can live a better life, longer.”

In its report, Morningstar proposes various solutions for the retirement sector, including expanding access to DC plans for workers, working on improving participation rates for those with access, and implementing plan design features such as auto enrollment and escalation.

Going forward, Morningstar’s research team will use the new model to consider various parts of the retirement investing space, including “the impact of broader economic factors and policy changes on retirement security outcomes, focusing on topics such as the Saver’s Match, auto-portability, annuities, and other policy proposals to change or overhaul the 401(k) system.”