For many workers, defined contribution (DC) plans and individual retirement accounts (IRAs) are their main savings vehicles. This trend gives employees greater responsibility for accumulating sufficient wealth to see them through retirement. Are workers, especially those approaching the end of their working career, saving enough? An analysis of account balances for near-retirees suggests widespread financial unreadiness for retirement looming, even before the stock and housing markets tumbled.
This empirical analysis uses data from the 2007 Survey of Consumer Finances (SCF), released earlier this year. A triennial survey conducted by the Federal Reserve Board, the SCF provides detailed information about household income, savings, wealth, benefits, investment and demographic characteristics of a representative sample of U.S. households. Figure 1 reports the range of retirement account balances, by earnings profile and pension coverage, for working households in the 55-to-64 age range.
Account balances for near-retirees, sorted by annual earnings quintiles and DB coverage (heads and spouses aged 55-64, at least one household member working)
Note: Retirement accounts include 401(k)s for current and prior jobs and all IRAs.
Source: Watson Wyatt’s calculations based on the 2007 Survey of Consumer Finances.
Many older workers approaching retirement have little or no retirement savings, according to the SCF. Nearly 30 percent of households in the sample have no personal retirement wealth. These tend to be lower-income workers — the DC account or IRA is empty for 52 percent of households in the lowest earnings quintile versus about 8 percent in the highest quintile. Even among middle- and upper-income groups, however, retirement wealth is generally inadequate. No more than 15 percent of households in any quintile have wealth equivalent to four times their annual earnings or more. Converted into a steady income stream, even this level of wealth alone would probably not be sufficient to support a financially comfortable retirement. Adding in Social Security, which could be sufficient for some low-income households, may not significantly improve retirement prospects for many households above the lowest earnings quintile.
Some DC plans are intended to supplement defined benefit (DB) plans, while others are the sole channels for retirement wealth accumulation. Yet there is no evidence that households without DB coverage are accumulating more retirement wealth. The ratios of account balances to annual earnings are strikingly similar with or without DB coverage.
Moreover, the survey was conducted before the financial crisis. The subsequent losses, which vary according to equity and housing market exposure, have almost certainly further dampened retirement prospects for workers relying on DC plans and IRAs.
The data sample in this analysis includes households with at least one member working at the time of survey. Observations are excluded if the household income is below the poverty guideline in the reporting year (i.e., $10,210 for 2007 by the Department of Health and Human Services) on the premise that the saving and investment behavior of low-income households could vary considerably with eligibility for government programs. To eliminate other potential behavioral outliers, observations are dropped if total net worth (including housing wealth, excluding Social Security) is negative, zero or more than $10 million; household income exceeds $1 million; or wages exceed $500,000.