Generation X Has a Big Need for Retirement Readiness Improvement

A study shows Americans at least 45 years old who have not yet retired are struggling financially and falling behind in retirement savings, but defined contribution (DC) plan sponsors can help.

The Protected Lifetime Income Index Study from the Alliance for Lifetime Income (ALI) shows 65% of Americans younger than 55 are concerned that their retirement income will not last through their lifetime, while 45% of those older than 55% are similarly concerned.

A new report extends the analysis of retirement readiness—and the financial circumstances associated with that—by examining the portion of the adult population who are old enough to begin seeing the approach of retirement—those at least 45 years old who have not yet retired. Among this group, ALI noticed a difference between those who have $75,000 in assets (in addition to a home) and those who don’t.

Michael Finke, with The American College and an ALI fellow, based in Bryn Mawr, Pennsylvania, tells PLANSPONSOR that $75,000 was just a natural cut off where attitudes were different. In addition, he suggests that $75,000 is an indicator that Americans in this demographic has saved regularly, while having less than $75,000 indicates a lack of saving. Nearly half of people in the analysis (47%) fall below this target. By the numbers, their retirement saving is falling short.

He says the biggest takeaway from the analysis is that among those with less than $75,000 in assets, three-quarters (77%) don’t expect their retirement savings and income to last their lifetime, compared to only one-third (32%) of those with at least $75,000 in assets. Generation X is really the first generation to have to support their retirement lifestyle on their own, as they are less likely to have pensions, Finke notes.

The low-asset group anticipates being heavily dependent on Social Security for retirement income, expecting it to account for a median of 62% of their income. The higher-asset group expects Social Security to be just one-quarter of their income on average, with the rest filled in by savings, pensions, annuities and other financial resources.

According to the report, two characteristics top the list of tangible drivers behind savings for retirement income: current income and pensions. Higher-asset households have substantially higher incomes on average. Only two in ten (18%) higher asset households have current incomes less than $75,000, and only 3% have incomes less than $35,000. By contrast, seven in 10 (69%) low-asset households have incomes less than $75,000 annually and nearly one-third (31%) have incomes less than $35,000. In addition, half of high asset households (50%) have a pension compared to just one in five (20%) of those with low assets.

The analysis also finds that 20% of the lower-asset households have a high amount of debt, compared to just 3% of higher-asset households. And, 40% of lower-asset households say their current financial priority is paying off debt, compared to 19% of higher-asset households. The report notes that even those with higher accumulated assets do not seem to be financially comfortable, as their highest financial priority is covering expenses.

How plan sponsors and advisers can help


Finke concedes that $75,000 will not buy enough income for retirement. He says the first thing most economists would tell defined contribution (DC) retirement plan sponsors is to automatically enroll employees in the plan and at a high enough rate to save enough to fund a base level of income in retirement. Plan sponsors should also consider automatic escalation and educating employees about the importance of saving in the retirement plan. “Automatic features have created a lot of movement towards adequate retirement income,” he says.

But, Cyrus Bamji, head of communications for ALI, in Washington, D.C., notes that the focus for DC plan participants has been on accumulating assets, and they have confidence in big savings numbers, but there hasn’t been much focus on educating participants about how much income their savings will produce. “[Participants] don’t understand what they can draw down from their savings,” he says.

Finke says a colleague wrote a paper showing that when participants see a translation of their account balance into retirement income, it motivates them to save more.

Of course, ALI is big believer in having a part of savings carved out to buy protected lifetime income, Bamji says. And, according to Finke, for a long time economists have said one of the big problems with the DC plan system is it doesn’t provide employees with a benefit like defined benefit (DB) plans that participants can count on to not run out of money in retirement. “Participants will have a difficult time deciding how to pull income out of their assets to last a lifetime. Most economists agree annuities are best for that,” he says.

Finke notes that the big barrier to adoption of guaranteed lifetime income products in DC plans is many plan sponsors feel the fiduciary liability is too great, but new legislation provides a push for plan sponsors to feel more comfortable. “This is especially important for developing innovative default investments that the average employee will be placed in. It will make workers feel more secure,” he says.

“If given a choice to add some kind of protected lifetime income they would be able to count on regardless of market movement, I’m pretty sure most employees would choose that option,” Bamji says.

He also believes having good financial advice is important. “Back in my day, there was very little guidance. Participants didn’t know how much to save or how to invest. Financial advice early on would have been helpful. Plan sponsors need to provide that kind of advice and counsel,” Bamji says.

“Advisers can help employees navigate very complex decisions about how much to save and how to invest that money to be able to match retirement goals,” Finke says. “I would love to see in the future more workers having access to professional financial advice to help them feel more comfortable that their actions today will lead to adequate retirement income.”