You’re Unprepared for Retirement, but It’s Not Your Fault

401k, retirement, savings

The jar is empty.

Income shocks are all too common, absolving Americans of much of the blame for poor retirement readiness, according to a recent report from The New School for Social Research.

“Americans of all income levels with a 401(k) are only saving about a third of the amount needed to maintain their living standards in retirement,” write Teresa Ghilarducci and crew. “They’re frequently being told the shortfall is their fault. But new research …finds that almost no one is safe from periods of lost income due to a health crisis, job loss or other life transitions during their working years.”

In fact, these income disruptions, defined as an annual earnings drop of more than 10 percent, are so common that 96 percent of Americans experience four or more of these income shocks by the time they reach age 70, according to the report, produced on behalf of the National Endowment for Financial Education (NEFE).

“The story is more nuanced than simply saying Americans are failing at retirement savings,” Ted Beck, president and CEO of NEFE, said in a statement. “No one likes to believe that income shocks will happen to them. Yet this research shows that it is not a matter of if something will disrupt earnings, but when and how severe the effects of such shocks will be.”

Most retirement savings research looks for a single factor—such as medical expenses—to explain why individuals aren’t saving enough for retirement.

But the study, led by Ghilarducci and Anthony Webb, Ph.D., considers the reality that income shocks such as unemployment, divorce and other earnings changes often cluster together; and the impacts of these shocks vary in magnitude depending on the person’s race and socioeconomic status.

Age

In addition to race, citizenship and other demographic characteristics, the study looked at American male workers in four age groups: ages 25-34, ages 35-54, ages 55-61, and ages 62-70.

By age 55-61, older men have $11,000 to $47,334 more in retirement savings (depending on income level) than their younger counterparts. In something of a headscratcher, the report notes that older men are more likely to:

Race

The effect of being nonwhite is largely negative. Compared to their white peers, nonwhite workers had significantly lower retirement savings:

The racial impact is more negative and significant among the top 10 percent of earners (-$19,000 to -$54,000) than among the bottom 50 percent (-$8,000 to -$16,000).

Income

Because the impact of life events depend heavily on the cushion one has in wealth and income, the sample also was divided into three income groups.

Top 10 Percent

Workers in the top 10 percent of national income distribution have more than three times the assets of workers in the middle group. Those in the top 10 percent are:

Middle 40 Percent

Workers in the middle have three times the assets of the bottom group. Of those in the middle 40 percent:

Bottom 50 Percent

Of those in the bottom 50 percent:

The middle and bottom groups are more likely to:

How Common Are Income Shocks?

The Effects of Income Shocks

Unsurprisingly, those in the middle- and lower-income groups are more likely to experience economic shocks from job loss or poor health and they are more negatively affected by earnings losses.

For those lucky enough to have a retirement plan at all (only 7 percent of the bottom income group have defined contribution plans), these funds often are the only resource to turn to in times of financial need.

By far the most negative impacts come from declines in health, including long-term illness and work-limiting disability.

When a low- or middle-income worker cannot work, or when their income decreases significantly for any reason, often they withdraw money from retirement savings accounts—and pay large penalties—or they stop contributing to their retirement savings altogether.

Even decreasing the amount of their contributions can have lasting detrimental effects on savings momentum over time.

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