Mind the Gap! Retirement Shortfalls are Ahead For All But the Most Affluent Americans

Published on March 25, 2024

Baby boomers beware: the retirement income gap might be too big to fill in at this point. This goes for high earners as well, and Gen X and millennials may encounter retirement shortfalls as well.

A study by Vanguard used Social Security figures for workers from different age groups and income levels to compare those workers’ projected retirement income with what their approximate financial needs would be. The groups were broken down into four cohorts: low-income, middle-income, affluent, and high-income individuals, and across three generations (late baby boomers ages 62-67, Gen Xers, and early millennials ages 37-41).

Retirement readiness did not score high marks for most people in the millennial, Gen X, and late baby boomer groups except for high earners. The study’s authors reported that “low-, middle-, and upper-middle-income workers, who have annual earnings in the 25th, 50th, and 70th percentiles* of the national income distribution, may fail to accumulate enough to meet the spending levels typical of today’s retirees.”
 

This is because high earners rely less on Social Security benefits to fund their retirement income needs. The study revealed that Social Security funds:

• only 18% of a wealthy 95th percentile earner’s needs
• 46% of the needs for a 50th percentile earner
• 62% of the needs for someone in the 25th percentile.

*Median take-home incomes of $22,000, $42,000, and $61,000 respectively; the wealthiest 95^th percentile took home $173,000.

All but the wealthiest late boomers who are entering their retirement years now should be worried. The implication is that income level also determines the ability of people to save for their retirement as opposed to relying on Social Security to fill the income gap.

The Vanguard study goes into great detail about the different income cohorts and the percentage of retirement income they will have to self-fund vs. having the savings to support them after they stop working. The bottom line is that with Social Security benefits always in peril of being cut (which would have the biggest impact on the lower-income population), and the challenges of workers across income levels to save enough, the retirement shortfall is of concern.

Especially as we see so many Americans living longer.

The longevity factor in retirement readiness

It is no longer unusual for Americans to live into their 90s and even to become centenarians. That is certainly something to celebrate—but puts an affordable retirement at risk for many seniors. Although the CDC places U.S. life expectancy at 73.5 years for men and 79.3 years for women, a survey from Corebridge Financial and The Longevity Project reveals more ambitious lifespan goals: 54% of respondents said their goal is to live to 100.

However, those individuals may not plan to work longer to fund that longer retirement timeline.

• Forty percent of respondents said they still plan to retire between ages 65 and 69.
• Twenty-two percent want to retire a bit earlier, between ages 62 and 64.
• Twelve percent want to retire early, when they are between 50 and 61 (the percentage is higher—17%–among Gen Z respondents).

 
That means three to five decades of retirement years to fund.

While the retirement age goals are ambitious, three-quarters (76%) of the survey’s participants also said their retirement savings and investments fall short of what they’ll need for income during those decades. This may be why more than 25% said they will have to work past age 70 to afford retirement. Other participants are either extremely confident they won’t outlive their savings (27%) and just over one-third (36%) feel they can make their savings last for as long as they need.

Save for a long-haul retirement with a self-directed IRA

At Next Generation, we’re all for long, happy lives for our clients. We are also advocates for taking control of your future (as in your retirement income). After all, aiming to live a long life with the income you need in retirement takes planning. And for many investors, that means funding and investing through a self-directed IRA.

A self-directed IRA enables workers of all ages to invest their funds in a broad array of alternative assets, which helps them build a more diverse retirement portfolio and build a hedge against stock market volatility. Many readers of retirement age have lived through severe economic downturns in the past 25 years—from the dot com bubble burst to the 9/11 tragedy to the 2008 crash and Great Recession—and the cyclical market swings that can make investors dizzy.

By investing in alternative assets you already know and understand, you can build retirement wealth with greater flexibility—and for the long term. Think real estate, precious metals, private equity funding, royalties, private placements…the list goes on when you move outside of the typical stocks, bonds, and mutual funds offered by most banks and brokerage houses.

When you open a self-directed IRA with Next Generation, you receive superior customer service from a long-time administrator and custodian with expertise in self-directed retirement plans. Our team reviews all self-directed transactions to ensure our clients are investing within IRS guidelines. We manage all required filing and paperwork and hold the assets on behalf of our clients.

Plus, we love client education—it’s like lifelong learning for self-directed investors. Our team is available to answer your questions about the many nontraditional investments allowed through self-direction. You can reach us at NewAccounts@NextGenerationTrust.com or 888.857.8058. You can also register for a complimentary educational session before you get started or at any time throughout your self-directed investing journey.