On Track for A Retirement-Savings Shortfall?

A new study projects that 40.6 percent of U.S. households are on track to have retirement savings fall short of retirement-spending needs. Here's what to do now to improve your retirement security.
By Richard Barrington

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Retirement saving is a tough job – and one at which many Americans are failing. A recent study of American households headed by someone from 35 to 64 years old found that about four out of every ten are on track for retirement savings to fall short of their needs.

This news shouldn’t discourage you from trying to improve your retirement savings. Quite the opposite, it’s a reminder not to become complacent about reaching your goals and, instead, to attack the job as soon and as thoroughly as possible.

Assessing retirement-savings shortfalls

The Employee Benefit Research Institute (EBRI) has a Retirement Security Projection Model (RSPM) that focuses on a comparison of projected retirement income against expected expenses. The RSPM takes into account funding from a variety of sources, including social security, retirement-plan balances and home equity. Based on current levels of funding, the EBRI uses this model to calculate the probability of today’s workers running into a retirement-savings shortfall at some point in retirement.

And the news, on several fronts, is not good:

  • How many

    Fully 40.6 percent of households headed by someone aged 35 to 64 are on track for a retirement-savings shortfall. That age range is significant because it comprises people who are typically still working and are far enough along in their careers to have started saving for retirement.

  • How much

    Typically, these retirement-savings shortfalls are not minor deficiencies. The EBRI figures project that the average retirement-savings deficit among people on track for a shortfall is in excess of $100,000.

  • What makes it worse

    Retirement shortfalls can get even worse if something isn’t done about providing more adequate funding for social security. Current projections indicate that, by 2034, insufficient funding for social security would force a reduction of benefits. This is expected to hit younger workers harder than any other age group.

    Among workers aged 35 to 39, a reduction of social security benefits would reduce projected retirement readiness from 57.9 percent to 52 percent.

  • Longevity risk

    The EBRI study highlights the role longevity risk plays in retirement planning. The longer you live, the more retirement funding you will need, and just moving up one quartile in longevity can more than double your projected retirement-funding shortfall.

How to avoid a retirement-savings shortfall

If the key takeaway from all of this is not to take your retirement security for granted, then what should you do about it? Here are some suggestions:

1. Ask yourself now: How much do I need to retire?

The first step toward meeting a goal is to figure out what that goal is. Use a retirement calculator to figure out how much money you need to support yourself in retirement. This involves being realistic about retirement spending, adjusting future costs for inflation and figuring out how your savings might spread out across your retirement years. A retirement calculator can help you take all of that into consideration so you understand how much to save.

2. See the whole picture: Factor in multiple retirement-funding sources

While saving for retirement is a big job, there are several components that can contribute to meeting your retirement needs. Social security, retirement plans and non-retirement assets can all be part of the picture. Learn about each component so you factor them into your retirement plan correctly.

3. Younger workers: Don’t treat retirement savings as an older person’s problem

Retirement may seem a long way off to workers in their 30s, but it is not just a concern for older workers. In fact, the EBRI’s projections show that, if funding issues force a reduction in social security benefits, it will have the greatest impact on younger workers. That’s because younger workers will have to spend more of their retirement years with those reduced benefits.

4. Older workers: Build your budget around catching up

At the other end of the spectrum, the projected shortfalls for workers in the 60-to-64 age group show that older workers need to make up for lost time. Catch-up contributions offer an additional tax break to help people over 50 make up ground, but this takes a serious budget commitment to put the extra money aside. If you have to cut spending to make that happen, then so be it. Otherwise, you could very well be stuck with reduced retirement spending in a few years.

5. Don’t “set it and forget it” when it comes to retirement savings

The EBRI numbers show there are ups and downs in retirement-savings projections for different age groups. This is a reminder that a plan that seems to be on track at one point could go off course later on. Revisit your retirement plan regularly to make sure your assumptions remain on target.

The data indicate a large number of Americans are on track for a retirement-savings shortfall. However, just because many of your peers may be headed for trouble doesn’t mean you can’t avoid it if you do the right things.

More resources on retirement plans:

401(k) contribution limits for 2019

How to size up retirement benefits when accepting a job

Does your employer’s 401(k) match measure up?

5 Ways to Stress Test Your Retirement Plan

People Grow Less Financially Secure as Their Retirement Progresses

More resources on saving for retirement:

Starting your career? How to start a retirement fund in your 20s

Health or wealth: juggling HSA and 401(k) contributions

How to use a health savings account to build retirement wealth

Financial checklist: How to invest in your 20s

Retirement savings calculator

About Author
Richard Barrington has been a Senior Financial Analyst for MoneyRates. He has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications. Richard has over 30 years of experience in financial services. He has earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the “CFA Institute”).