A new Morningstar Model of U.S. Retirement Outcomes—a simulation tool that considers individual characteristics, healthcare costs, and projected longevity to assess retirement income sufficiency—finds that workers without future defined-contribution plan participation are over twice as likely to run short of money in retirement.
Through use of the model, the Morningstar Center for Retirement & Policy Studies today published new research examining potential retirement inadequacy among American workers.
“The model paints a clear picture: Participating in an employer-sponsored defined-contribution plan significantly lowers the risk of retirement shortfalls,” said Spencer Look, the report’s lead author and associate director of retirement studies for the Morningstar Center for Retirement & Policy Studies. “Our model not only sets a new standard in retirement research, but we’ll be able to identify actionable insights for policymakers and plan sponsors to improve product design, all with the goal of helping more Americans reach their retirement goals.”
The research report, “Beyond the Retirement Crisis Headlines: Why Employer-Sponsored Plans Are the Key to Retirement Adequacy for Today’s Workers,” suggests that certain demographics may be more likely to run short of money in retirement due to variables such as their current retirement savings, levels of financial resources, existing disparities in retirement account balances, and whether they participate in a DC plan.
About 55% of single females may be at risk in retirement, compared with 41% of couples and 40% of single males
When comparing retirement funding ratios for Gen Z, Millennials, and Gen X households in the U.S., the research finds 57% of those who do not participate in a defined-contribution plan in the future may not be able to sustain projected retirement expenses, compared with 21% for those with at least 20 years of future participation. The career-long 401(k) participants who are at risk likely cash out their balances upon a job change or deplete their accounts via pre-retirement withdrawals.
Across the U.S., the model predicts approximately 45% of American households will run short of money in retirement. Moreover, about 55% of single females may be at risk in retirement, compared with 41% of couples and 40% of single males.
A socioeconomic disparity exists: 61% of Hispanic Americans and 59% of non-Hispanic Black Americans are projected to run short of money, compared with approximately 40% for both non-Hispanic other Americans and non-Hispanic white Americans.
Early retirees more likely to run short
Nearly 54% of U.S. households could experience retirement shortfalls if they retire at 62 years old, compared with 45% if retiring at 65. This can be improved by waiting until age 67 (38%) or age 70 (28%).
Nearly 54% of U.S. households could experience retirement shortfalls if they retire at 62 years old
Looking across generations, Baby Boomers and Gen X have a higher risk of experiencing retirement shortfalls (52% and 47%, respectively) compared with Millennials (44%) and Gen Z (37%). The shift from defined-benefit pensions to DC plans left Boomers and Gen X with less time to accumulate savings, while younger generations benefit from more recent features like automatic enrollment, managed accounts, and target-date funds.
The report says the retirement industry should focus on providing more Americans with access to an employer-sponsored plan and improve participation rates for those who already have access. Plan sponsors should consider adding auto-enrollment and additional features to a plan, such as a student loan match or an emergency savings account, to boost participation.
The Morningstar Model of U.S. Retirement Outcomes allows researchers to study retirement readiness across the U.S. and help predict the effects of policy, product design, behavioral changes, and other variables on retirement preparedness. The Model includes stochastic modules for both accumulation and decumulation phases that can assess the prospects of future retirement income adequacy for today’s workforce.
Future uses of the model will aim to further simulate retirement scenarios to inform debates on how best to enhance retirement outcomes for all. For more information and frequently asked questions, click here.
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