The crisis is heightened for those without access to a 401(k), new research predicts

Almost half of American households will run short of money in retirement if they stop working at 65, new research predicts, raising concerns about the financial health of the country as people live longer and have greater responsibility for their own retirement savings.

That research, from the Morningstar Center for Retirement & Policy Studies, came from using a new simulation tool that looks at individual characteristics, healthcare costs and projected longevity to determine the sufficiency of people’s retirement income.

“The model paints a clear picture: participating in an employer-sponsored defined-contribution plan significantly lowers the risk of retirement shortfalls,” Spencer Look, the report’s lead author and associate director of retirement studies for the Morningstar Center for Retirement & Policy Studies, told MarketWatch. “So does working a little longer and delaying Social Security as much as you can. I know it’s not something everyone can do, but it helps.”

The model predicts about 45% of American households will run short of money in retirement. The outlook for single women was even more bleak, with about 55% of them seen as at risk in retirement, compared with 41% of couples and 40% of single males, Morningstar found.

The projections for different socioeconomic groups varied. As many as 61% of Hispanic Americans and 59% of non-Hispanic Black Americans were seen as running short of money, compared with about 40% for both non-Hispanic other Americans and non-Hispanic white Americans, the research showed.

There isn’t necessarily a national retirement crisis, Morningstar’s Look said, but instead a crisis for those who do not or are unable to participate in a 401(k) plan or other defined-contribution plan.

Not everyone has a retirement plan through work. About 69 million workers, or 56% of the nation’s workforce, lack access to a retirement plan through their employer, according to the Economic Innovation Group.

The likelihood of running out of money mirrors worries U.S. workers already have. Two-thirds of Americans fear running out of money more than death, 58% worry about losing independence and 52% fear being a burden on family, according to a study by Corebridge Financial and The Longevity Project.

Part of the shortfall depends on when a person retires. Nearly 54% of U.S. households could experience retirement shortfalls if they retire at 62 (the earliest a worker can claim Social Security benefits), compared with 45% if retiring at 65. This can be improved by waiting until age 67 (38%) or age 70 (28%), Morningstar found.

Most people don’t work that long.

The average age most people expect to stop working is 65, according to Northwestern Mutual, based on a study of 4,588 U.S. adults 18 or older. But sometimes layoffs, health issues or caregiving responsibilities waylay those plans. As of 2022, the average retirement age was 61.5 years old, according to a Gallup survey.

The key to funding retirement is to take advantage of any 401(k) plans or similar retirement tools your employer may offer and fund it to get any matching contributions from your company. Then fund it some more – and never touch it, the researchers found.

The Morningstar research also found that 57% of those who do not participate in a defined-contribution plan in the future may not be able to sustain projected retirement expenses, compared with 21% for those with at least 20 years of future participation.

Among 401(k) participants who participated throughout their careers and are still at risk of running out of money, they likely cashed out their balances upon a job change or depleted their accounts via preretirement withdrawals, Morningstar found.

Looking across generations, baby boomers and Generation X have a higher risk of experiencing retirement shortfalls (52% and 47%, respectively) compared with millennials (44%) and Gen Z (37%). Baby boomers are those born between 1946 and 1964, while Gen X was born between 1965 and 1980. Millennials were born between 1981 and 1996 and those in Generation Z were born between 1997 and 2012.

Baby boomers and Gen X saw retirement trends shift from pensions to self-funded retirement plans in their lifetimes, giving them less time to save on their own. Meanwhile, younger generations starting earlier and benefiting from more recent features like automatic enrollment, managed accounts and target-date funds, Morningstar found.

Jack VanDerhei, director of retirement studies at Morningstar Retirement, said that financial-literacy efforts to help people better understand retirement, compound interest and investing strategies have not helped as much as employers had hoped.

“Financial literacy is nice and helpful but it’s not the panacea employers had hoped for,” VanDerhei said.

Look agreed. “People don’t understand retirement. It may seem so far off to them,” Look said.

-Jessica Hall

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