It is no secret to the retirement industry that significant retirement challenges loom for many U.S. workers. While defined contribution plans—mostly 401(k) plans—have many features and are good at helping people save in a tax-deferred way, most Americans unfortunately are not saving and effectively investing enough to have even half of their pre-retirement income once they leave the workforce.
Recent retirement industry developments focus on ways to account for the financial challenges that can derail retirement savings. As retirement strategists, when retirement savings get pushed off track, can we help people get back on track? How can we better account for the many real-life challenges (often unexpected) that negatively impact retirement savings?
In July, we surveyed 3,673 U.S. working people and 1,588 retirees (age 50-75) from the Baby Boomer, Generation X, Millennial, and Generation Z generations. The findings are summarized in the third annual Goldman Sachs Retirement Survey & Insights Report 2023, Diving Deeper into the Financial Vortex: A Path Forward. It explores steps employers, sponsors, advisors, and consultants can take to help employees navigate turbulence and find unique paths to retirement.
Of primary interest, we learned that more U.S. workers increased their retirement savings over the last year, and more respondents believe those savings are on track. That is good news.
But a financial vortex of competing responsibilities that limit or delay retirement savings has worsened and may threaten to derail the ability of workers to achieve their financial goals. Those closest to retirement (working Boomers and Gen X) are more likely to say they are off track and more concerned about their ability to meet their retirement savings goals.
It is not sufficient to simply tell people to save more; that may not be possible. The financial vortex is resilient, and its impact is not fully addressed through the current retirement system. When people experience “financial vortex moments,” the impact can be severe. These issues can reduce retirement savings 30-40% overall. Sadly, catching up is hard.
Preparation for the unexpected can help: 78% of survey respondents with less than one month of income in emergency savings reported that hardships hurt their ability to save for retirement, versus 54% for those with three or more months saved. Emergency savings can not only prevent people from taking loans or hardship distributions from their retirement plans, but it can also help people continue to save for retirement. Emergency savings are critical to financial resiliency.
Not being able to retire when desired can be a major issue for workers: 21% of respondents believe the financial vortex will delay their retirement by four or more years; but sometimes, retirement comes earlier than expected. Among retirees, 50% retired earlier than expected. Of these, 47% retired for reasons outside their control (most often due to caregiving or poor health), and 54% retired more than four years earlier than expected.
Four years out of the workforce in the early 30s can result in 18% lower retirement savings.
It is not always easy to predict, and it can be difficult to face, but early retirement (especially forced) can significantly impact whether people ultimately have sufficient retirement savings. It leads many to seek part-time work as a key part of their retirement income strategy.
Caregiving may seem unrelated to retirement, which is exactly why it is important to raise awareness. The U.S. retirement system is primarily employer-based, so people who are not employed because they undertake caregiving responsibilities are likely not saving in a retirement plan or receiving employer contributions. For example, four years out of the workforce in the early 30s can result in 18% lower retirement savings.
A personalized financial plan for retirement is an essential tool for all savers to help understand when they are off track, and how to adjust their saving and investment strategies to recover. The longer it takes to respond, the more significant the adjustments may need to be. Services that provide automated and periodic updates can help by raising awareness to being off track quickly.
Many financial vortex issues are not fully addressed by today’s retirement plans, but that can change. SECURE 2.0 allows 401(k) plans to offer in-plan emergency savings accounts, student loan repayment benefits, and new financial emergency distribution options. Working respondents said emergency savings accounts and financial planning services were the top 401(k) plan enhancements they would like, highlighting the desire to navigate financial challenges.
Given that only 13% of working respondents met a high financial literacy standard, financial education also should be a priority.
The financial vortex remains a significant problem for many U.S. workers and retirees. Unplanned and often unpredictable financial challenges push too many of us off track too often. Helping workers navigate life’s circumstances with innovative plan features is the next evolution to improve the American retirement system.
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