Fed Report Offers Picture of Retirement Readiness Situation in America

Over two-fifths of non-retirees think their retirement savings is not on track, and having taken a loan or distribution, as well as discomfort with investing, lowers retirement confidence.

Less than two-fifths of non-retired adults think their retirement savings is on track, whereas over two-fifths think it is not on track and about one-fifth are not sure, according to The Federal Reserve Board’s latest report on the Economic Well-Being of U.S. Households.

One-quarter of the non-retired indicate that they have no retirement savings or pension whatsoever.

Older adults are more likely to have retirement savings and to view their savings being on track than younger adults. However, even among non-retirees in their 50s and 60s, one in eight lacks any retirement savings and less than half think their retirement savings is on track. Additionally, retirement savings vary substantially by race and ethnicity. White non-retirees are 14% more likely than black non-retirees to have any retirement savings, and they are 18% more likely to view their retirement savings as on track.

According to the report, self-assessments of retirement preparedness vary with the amount of current savings and time remaining until retirement. Among young adults younger than 30, people typically believe that their savings are on track if they have at least $10,000 set aside for retirement. The amount of savings needed for a majority to think they are on track increases as people near retirement, rising to at least $100,000 of retirement savings among those age 40 and older. Approximately nine in 10 people with at least $500,000 of retirement savings think they are on track, regardless of their age.

Withdrawing from accounts and discomfort managing investments

Some people withdraw money from their retirement accounts early for purposes other than retirement, according to the report. Overall, 5% of non-retirees have borrowed money from their retirement accounts in the past year, 4% have permanently withdrawn funds, and 1% have done both. Those who have withdrawn early are less likely to view their retirement savings as on track than those who have not—27% versus 39%, respectively.

Among those with self-directed retirement savings, including 401(k)s, IRAs, and savings outside of formal retirement accounts, comfort in managing investments is mixed. Three-fifths of non-retirees with these accounts have little or no comfort managing their investments. On average, women of all education levels and less-educated men are less comfortable managing their retirement investments than other groups.

The report says expressed comfort in financial decisionmaking may or may not correlate with actual knowledge about how to do so. To assess actual financial literacy, respondents were asked five basic questions about finances. The average number of correct answers is 2.8 with one-fifth of adults getting all five correct. The average number of correct financial literacy questions was higher for those who are generally comfortable with managing their retirement accounts (3.5 questions) than those who have savings but limited comfort (2.9 questions).

When and why people are retiring

Half of retirees in 2017 retired before age 62, and an additional one-fourth retired between the ages of 62 and 64. Average retirement ages differ by race and ethnicity, with black and Hispanic retirees more likely to have retired before age 62 (58% and 55%, respectively) than white retirees (48%).

In choosing when to retire, a desire to do other things than work or to spend time with family were the most common factors. Fifty-eight percent of whites cited a desire to do other things, while 63% of Hispanics cited wanting to spend more time with family. In addition, two-fifths of retirements before age 62—and one-third between ages 62 and 64—involved poor health as a contributing factor. About one-fourth of those who retired before age 65 said the lack of available work contributed to their decision.

Sources of retirement income

For income in retirement, 86% of retirees in 2017 received Social Security benefits, and 56% drew on a defined benefit pension, while 58% used savings from an IRA, 401(k), or other defined contribution plan. The types of retirement savings for current retirees differs substantially from non-retirees, for whom defined contribution (DC) plans are much more common than defined benefit (DB) plans.

The sources of retirement income also differ by race and ethnicity. Black and Hispanic retirees are less likely than whites to have self-directed savings. In aggregate, 71% of black retirees and 66% of Hispanic retirees are drawing from at least some private retirement savings (other than employment during retirement and relying on family), compared to 86% of white retirees.