Low- and middle-income workers across all age groups are way off track in being able to retire comfortably, according to Vanguard Group's inaugural retirement outlook report released Oct. 3.
Late baby boomers — those between ages 61 and 65 — in the bottom quartile of the income distribution will be able to replace just 64% of the pre-retirement income, falling 32 percentage points short of the 96% replacement income they need to meet projected retirement spending needs, the report found.
Low-income early millennials — those between the ages of 37 and 41 — also face a 32-percentage-point savings shortfall, with mid-Generation X — those between 49 and 53 — looking at an even larger shortfall of 33 percentage points.
Middle-income workers across all three generations of workers are also projected to face substantial savings gaps, ranging from 25 percentage points for millennials to 33 percentage points for baby boomers.
High-income earners, in contrast, are not expected to experience shortfalls of the same magnitude, if they experience any shortfalls at all. Baby boomers in the 70th percentile of income, for example, face a 17-percentage-point retirement savings shortfall, while those in the 95th percentile will have more than what they need to replace their pre-retirement income.
The sobering report acknowledges that for many Americans "the outlook is challenging" and that the self-financing of retirement in many instances "falls short."
"High-income workers — those in the top 5% of the income distribution — can readily finance life after labor. The rest may struggle," the report said.
The report offers one glimmer of hope for the nation's youngest workers, saying they will benefit from automatic enrollment and improved retirement plan design that encourages saving and investing in age-appropriate asset allocations.
Millennials in the 50th percentile of the income distribution, for example, are already ahead of baby boomers in terms of their projected income replacement. Vanguard estimated that millennials at the 50th income percentile will be able to generate retirement income equal to 58% of their pre-retirement earnings, 8 percentage points more than the 50% of pre-retirement earnings estimated for middle-income late baby boomers.
Vanguard based the study on the Vanguard Retirement Readiness Model, which uses Vanguard's capital markets forecasts and empirical data on household balance sheets, savings rates, and spending patterns to estimate retirement readiness for different demographic groups.
