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Easing the Retirement Crisis

Two studies cast doubt, highlighting need for industry to lead the way.

Many Americans face a scary prospect: surviving on much less money during retirement than they’re used to living on or not being able to afford a retirement at all. Every year, there are new reports about how many Americans are unprepared for retirement, with headlines like “42% of Americans Will Retire Broke” (Huddleston 2018) and “How 401(k)s Have Failed Most American Workers” (Morrissey 2016).

There’s sometimes debate among academics and researchers about the precise nature of the retirement-savings gap (Rhee 2013; Bee and Mitchell 2017; VanDerhei 2015). No matter how you slice it, however, nearly half of Americans have saved nothing for retirement, and the median 401(k) balance is less than $10,000 among working-age U.S. households that have saved something (Spiegel 2018; Grinstein-Weiss 2015). If that amount doesn’t change, people’s ability to comfortably retire is severely limited, and they’re highly dependent on Social Security remaining solvent. And many Americans are worried. In a recent EBRI survey, for example, only 17% of U.S. workers felt very confident in their ability to retire comfortably (EBRI 2018).

Dire outcomes—needing to live on very little during retirement or failing to retire until much older—are vivid and daunting; they capture people’s attention and drive anxiety. It needn’t be that way, though.

In a new Morningstar research study, we ask what Americans, and their advisors, can do to better prepare for retirement. We find that the bleak picture can change—if specific actions are taken. This article summarizes the results of that research. For more information on the study, and related pieces, see Morningstar’s Investor Success Project at

Our Simulation
In the research, we analyze eight changes individuals can make to better build their financial future. The actions fall into three categories: financial planning (adjusting one’s standard of living in retirement; delaying retirement; increasing contribution rates), investing (increasing net returns from investing; using a more aggressive asset allocation), and investor behavior (signing up for increased contributions over time; starting with a larger amount of savings; and choosing whether to invest one’s savings at all).

The analysis employs a simulation model to forecast the effects of changes in U.S. saving and investing behavior on people’s ability to fund a comfortable retirement, based on a nationally representative sample of Americans from the 2016 Survey of Consumer Finances. Each simulation starts with an individual’s current situation, then tracks the person’s assets up to retirement, modeling contributions, changes in asset allocation according to a standard investment glide path, and market performance affecting the portfolio. At the end of the simulation, it calculates two primary values:

  1. The percent of need available—the amount each person has available to them on the first day of retirement (including Social Security[1]), divided by their total retirement need. Because market conditions vary, we examine two snapshots in particular: “normal markets” (50th percentile of outcomes) and “bad markets” (20th percentile of outcomes).

  2. The probability of success—how often the person achieved his or her total retirement need across 1,000 simulations with randomly varying market performance. This is a measure of the person’s safety, or security.

This analysis ran about 400 million simulations in total: 3,916 households in the nationally representative sample, across 100 scenarios in which the households change contribution rates, their retirement ages, or other aspects of their financial lives, across 1,000 randomly determined market scenarios.

      The Financial Future of Americans
      The analysis starts by establishing a baseline for the U.S. public: Will Americans be ready for retirement? As many other researchers have found, the picture is grim.

      We found that approximately 25.6% of the working population is likely to have what they need under normal (50th percentile) market conditions. Under bad market conditions (20th percentile), 18.5% of the population would have what they need.

      Even among mass-affluent households (more than $100,000 in investable assets), approximately 45.3% are projected to have the retirement savings they need by the first day of retirement, under normal market conditions. Only 32.2% would have what they need in bad markets.

      To visualize results across a group of households, we used a density plot showing the relative percent of those households at each level of funding for their retirement need (EXHIBIT 1).

      What Is Most Effective?
      We then analyze eight actions that individuals and their advisors could take, ranging from delaying retirement to increasing the proportion of stock in their portfolios. What did we learn? For both the general public and mass-affluent households, it’s the basics that matter the most. Saving more, choosing to invest one’s savings, delaying retirement, and lowering standard-of-living expectations have a far greater effect than asset allocation, reducing fees, or achieving alpha.

      EXHIBIT 2 shows how each factor influences outcomes for mass-affluent Americans, in the extreme.

      Austerity Isn’t Mandatory
      For each individual action, extreme changes— like a 20% increase in contributions— are needed to move the bulk of households into a comfortable financial place. However, such austerity isn’t necessary. Combining multiple, less-extreme changes can be quite effective.

      For example, if Americans delayed retirement until at least age 67 and contributed at least 6% in the meantime, that would boost the percentage of U.S. households having what they need from 25.6% to 71.2%. For mass-affluent households, these two actions boost retirement readiness from 45.3% to 72.9%. EXHIBIT 3 maps the range of such combinations of retirement age and minimum contributions. The blue line indicates locations on the map where 75% of Americans would have what they need for retirement, at the intersection of that retirement age and contribution rate, under normal market conditions. Red in the exhibit indicates better outcomes, and blue indicates worse outcomes. The bottom line is that combining multiple, less-extreme measures can be quite effective.

      One Size Fits Few
      Each household, however, has its own demographic and financial situation. Delaying retirement can be very impactful for one individual, but not effective for another. Similarly, as EXHIBIT 4 shows, the required contribution rate for working U.S. households to achieve 90% of their retirement needs varies greatly, all else being equal. For simplicity, the exhibit removes the 28.6% of households that would need to contribute either more than 50% of their income or nothing because of existing assets or Social Security payments. No one contribution-rate prescription fits the needs of more than 8.8% of households.

      Lessons for the Industry
      The current retirement outlook for Americans is indeed bleak. Our analysis intentionally used very optimistic assumptions—no unemployment, no debt, no future cuts in Social Security, a low estimate of people’s standards of living in retirement—and yet only 25.6% of working U.S. households are on track to have what they need. While mass-affluent households are better off, less than 50% will have what they need.

      Broad financial planning is essential, and multiple tools can help Americans succeed in retirement:

      • Multiple levers are available to improve this outlook. We analyzed eight different options and found that delaying retirement, contributing more, and lowering one’s expectations for retirement, can be tremendously effective.

      • Individually, even these levers require extreme actions to move the needle—like a 10-year delay in retirement. Combined, however, they are far more powerful and do not call for extreme actions. A minimum 6% contribution rate, for example, combined with a minimum retirement age of 67 would help 71.2% of households have what they need (up from 25.6% currently).

      • We also find that personalized advice is essential to help Americans succeed:

      • Beware of simple rules of thumb like “older people need asset allocation, and younger people need contributions.” We found that among older, mass-affluent households (ages 45 to 60), asset allocation is still the least impactful lever. Delaying retirement and cutting one’s expected standard of living matter most, in the extreme. The financial picture and most powerful tools to improve it are actually quite similar for younger (ages 25–40) and older populations, on average.

      • The generic default of a 3% contribution rate for retirement, used by many employers, is woefully insufficient and ill-fitting for most U.S. households. The 3% rate is only appropriate for 7% of households, and no single default is appropriate for more than 8.8% of households that need to contribute. The right answer isn’t a new default rate: It’s a personalized analysis of what each household needs. (See “Stop Guessing,” by Morningstar researchers Thomas Idzorek, David Blanchett, and Daniel Bruns, in the June/ July issue to learn how plan sponsors can customize qualified default investment alternatives to each participant.) Americans pay the price for not having advice tailored for their needs.


      Bee, C.A. & Mitchell, J.W. 2017. “Do Older Americans Have More Income Than We Think?” U.S. Census Bureau, July 25, Working Paper.

      EBRI and Greenwald & Associates. 2018. “Retirement Confidence Survey.”

      Grinstein-Weiss, M. 2015. “How Prepared Are Americans for Retirement: Written Testimony to the Special Committee on Aging.” Brookings, March 12.

      Huddleston, C. 2018. “Survey Finds 42% of Americans Will Retire Broke—Here’s Why.” GOBankingRates, March 6.

      Morrissey, M. 2016. “The State of American Retirement: How 401(k)s Have Failed Most American Workers.” Economic Policy Institute, March 3.

      Rhee, N. 2013. “The Retirement Savings Crisis: Is It Worse Than We Think?” National Institute on Retirement Security.

      Spiegel, J. 2018. “It’s Time to Redefine ‘Investor.’” Forthcoming Morningstar research paper.

      VanDerhei, J. 2015. “Retirement Savings Shortfalls: Evidence From EBRI’s Retirement Security Projection Model.” EBRI Issue Brief 410, February.


      [1] The analysis incorporates a limited estimate of the person’s future defined-benefit income from the Survey of Consumer Finances.

      This article originally appeared in the August/September 2018 issue of Morningstar magazine. To learn more about Morningstar magazine, please visit our corporate website.