An astounding 45% of American households are projected to run short on money in retirement, according to a new report. But the shortfall isn’t uniform across households. In fact, younger generations may actually be better prepared for retirement than their parents.
That’s according to Morningstar’s new Model of U.S. Retirement Outcomes, a tool that assesses how financially prepared workers are for their golden years. To demonstrate how it works, the Morningstar Center for Retirement & Policy Studies analyzed how likely it is that different groups of workers in the U.S. today will have adequate financial resources in retirement.
There are some surprising and not so surprising results. On the not-so-surprising side of things, Morningstar found that those participating in an employer-sponsored defined-contribution (DC) plan—like a 401(k)—are much less likely to experience a savings shortfall in retirement than those without one. In fact, those using such a plan for their retirement savings had average account balances four times higher than those who did not.
As for the report’s more unexpected findings, the biggest would be that younger generations appear to be in a better position than older ones, the research finds. Despite the pervasive storyline that millennials will never be able to afford to retire, Morningstar reports that 47% of Gen Xers and 52% of baby boomers may experience retirement shortfalls, compared with 37% for Gen Z and 44% for millennials.
That’s primarily because young boomers and Gen Xers were at the forefront of the shift away from pension plans and toward self-funded retirement savings. This means they have had less time—and started their careers with less access to quality investment information—than younger generations to save up on their own.
Morningstar’s research isn’t the first to note this disparity, and there are other changes in the retirement landscape that have helped younger generations save more. Target-date funds, managed accounts, auto-enrollment, and auto-escalation, for example, have only recently become more widely available.
“Even within these two generations there are discrepancies, as baby boomers were more likely to experience the early portion of the transition, when the understanding of how to use a DC plan was not as developed as it is now,” the report reads.
Need more proof that the shift to personal savings is hurting workers’ retirement? The report also finds that employees in the public sector are actually the best prepared for retirement, with Morningstar projecting that around 29% of them will experience a shortfall. That’s also the sector most likely to still offer employees a defined-benefit plan like a pension.
That said, Morningstar’s research assumes that Social Security payments will not change—something that isn’t 100% guaranteed in the U.S.’s current policy environment. As the report notes, the program creeps closer to insolvency each year, which could greatly affect retirement outcomes for most generations.
Finally, the report also finds that lower-income savers, Hispanic or Black Americans, and single women are much more likely to run out of money in retirement. Morningstar calls for a number of policy changes to help the situation, including providing more Americans with a workplace retirement (particularly to those who are lower-income) and advocating for the Saver’s Match, a provision of the 2022 SECURE Act 2.0 that should help low-income families.