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How well are you doing compared with other young people?
It can be difficult for young people to achieve financial stability in their 20s, new analysis has shown.
Those aged 22 to 29 years have become less likely to own a home, with the proportion of homeowners having fallen by 10 percentage points between 2008 and 2017 – from 37% to 27%1.
They’re also less likely to have money set aside. More than half (53%) of 22- to 29-year-olds had no money saved in a savings account or an Individual Savings Account (ISA) in 2014 to 2016, compared with 41% in 2008 to 2010. However, those who did had an average of £1,600 put away, up from £900.
Meanwhile, young people are now less likely to be in financial debt. Around 37% had financial debt (excluding student loans from the Student Loans Company), down from 49% in 2008 to 2010. That said, those in debt owed fractionally more (£1,900), on average, than in 2008 to 2010 (£1,800).
Clearly, not all young people face the same financial pressures.
Much depends on where people sit on the earnings scale. The highest earning 10% of 22- to 29-year-olds were paid at least 4.3 times as much per week as the lowest earners in 20172.
The gap is wider still for those with savings in savings accounts or ISAs (47%). The top 10% of savers had at least £15,000 put away in 2014 to 2016, while the bottom 10% had saved less than £100.
Likewise, there are differences in levels of financial debt. Among 22 to 29 year olds with debt (37%), the 10% most indebted owed at least £14,200 in 2014 to 2016, while the 10% least indebted owed £100 or less.
How does your financial situation compare? Use our calculator to find out how your earnings, savings and debt stack up relative to your peers.
1 in 3 Americans Has Saved $0 for Retirement
Saving for retirement is not an area of financial strength for Americans. Too often, meeting the financial demands of today means delaying, diminishing or simply never starting to save for tomorrow.
“There are plenty of obstacles Americans claim are in their way when it comes to saving for retirement: credit card debt, student loan debt, low wages, the need to save for a child’s college education, and the list goes on,” said Cameron Huddleston, Life + Money columnist for GoBankingRates. “Although all of these things can put a strain on our budgets, they don’t necessarily make it impossible to save for retirement.”
GoBankingRates asked Americans how much money they have saved for retirement and found that most people are behind on their retirement savings. These survey findings also provide a helpful benchmark against which readers can compare their own retirement savings balances and progress.
Survey: How Much Americans Have Saved for Retirement
The GoBankingRates survey was conducted as three Google Consumer Surveys, each targeted at one of three age groups: millennials, Generation Xers, and baby boomers and seniors. Each age group was asked the same question, “By your best estimate, how much money do you have saved for retirement?” Respondents could select one of the options as displayed below:
- Less than $10K
- $10K to $49K
- $50K to $99K
- $100K to $199K
- $200 to $299K
- $300K or more
- I don’t have retirement savings.
GoBankingRates analyzed the survey results to reveal key insights into how Americans of all ages are saving for retirement. Whether due to various economic factors or not correctly prioritizing finances, many people are not on track to have enough money to cover their expenses during retirement.
56% of Americans Have Less Than $10,000 Saved for Retirement
Most Americans are falling short of the amount of savings required for a comfortable retirement ― if they are saving at all. The most common responses to the question of what people have saved for retirement across all age groups are “I don’t have retirement savings” and “less than $10K,” breaking down as follows:
- One-third of Americans report they have no retirement savings.
- 23% have less than $10,000 saved.
This lack of savings indicates that just getting started on retirement planning is a significant obstacle for many people. This difficulty can be due to a lack of education on the importance of retirement savings, said Kristen Bonner, the GoBankingRates research lead for this survey. “Americans might also be feeling as though their employer match ― or lack of ― is not enough to make it worth it to open an account, as well the growing trend of changing jobs every couple years and not wanting to deal with rolling over funds from one account to another,” Bonner said.
Related: 27 Steps to Maximize Your 401k in 2016
It’s not all bad news, however:
- After “less than $10K,” the most common balance Americans have saved for retirement is “$300K or more.”
- A significant 13% of Americans’ retirement savings balances are in the top bracket.
“The fact that so many Americans do have $300,000 or more saved for retirement goes to show just how easily the amount of money in your retirement fund can grow over time if you are dedicated to contributing regularly,” Bonner said.
Women More Likely Than Men to Have No or Little Retirement Savings
The gap between men’s and women’s retirement savings is cause for concern for anyone planning for retirement. It’s as much as 26%, according to the 2015 Gender Pay Gap in Financial Wellness report from financial education company Financial Finesse. Overall, GoBankingRates’ survey findings show that women are significantly less likely to be sufficiently saving for retirement:
- Women are 27% more likely than men to say they have no retirement savings.
- Two-thirds of women (63%) say they have no savings or less than $10,000 in retirement savings, compared with just over half (52%) of men.
The gap between men’s and women’s retirement savings widens as balances get higher: Whereas men and women are about as likely to have $10,000 to $99,000 saved for retirement, men are twice as likely as women to have savings balances of $200,000 or more.
One reason women fall behind is the gender pay gap. “Women cannot save as much for retirement because they are not earning as much,” Bonner said, citing 2015 U.S. Census Bureau data that shows women earned $0.79 for every dollar men earned in full-time positions. Families trying to prepare for retirement need to factor such deficits into their financial plans.
“Women also are more likely to have gaps in employment to raise children and might not be contributing to retirement accounts during those periods when they’re not working,” Huddleston said.
Read More: Retirement Planning Checklist for Newlyweds
Women’s retirement savings needs are also greater than men’s. “Women not only need to catch up with men but they also need to save more because their medical costs tend to be higher in retirement,” Huddleston said. Women are also more likely to live longer, increasing their chances of outliving retirement funds.
To make up for anemic earnings and plan for their higher retirement costs, women need to be proactive and save aggressively. “Financial experts typically recommend saving 10% to 15% of your annual pay, so women should aim for that higher percentage to close the retirement savings gap,” Huddleston said.
Retirement Savings Correlate Closely to Age
Retirement savings are closely tied to savers’ stages of life. For young people just starting their careers, simply saving at all could be a sufficient goal, while those nearing retirement will likely want to have at least a few hundred thousands of dollars in their retirement accounts.
GoBankingRates conducted this survey in three different parts aimed at specific generational age ranges ― millennials ages 18 to 34, Gen Xers ages 35 to 54, and baby boomers and seniors ages 55 and over ― to get an accurate picture of how Americans’ savings differ by life stage.
- Millennials are 40% more likely to not have retirement savings than Gen Xers and 50% more likely than people age 55 and over.
- About half of Gen X is making a significant effort to save for retirement ― 48.2 percent have saved over $10,000, including 26.7 percent who have saved $100,000 or more.
- Boomers and seniors are 85% more likely than Gen Xers to have $300,000 or more in retirement accounts and 4.6 times more likely than millennials to have saved this amount.
3 of 5 Millennials Have Started a Retirement Fund
As the youngest group surveyed, millennials are the least likely to have substantial retirement savings. Three in four (72%) of millennials have saved less than $10,000 or nothing at all.
Additional findings show how millennials’ retirement savings reflect their life stage:
- 42% of millennials indicated they have no retirement savings.
- The number of millennials with no retirement savings yet is 52% for younger millennials ages 18 to 24 but a more reasonable 36% for older millennials ages 25 to 34.
- The most common balances that younger millennials have saved are “less than $10K,” at 30%, and “$10K to $49K,” at 11%.
- Older millennials are twice as likely as younger millennials to have saved $10,000 to $49,000, at 14% versus 7%, respectively.
Read More: Retirement Planning Checklist for Millennials
Overall, fewer millennials are saving for retirement than should be, but many millennials’ retirement savings are actually on track, especially among the those ages 25 to 34. For this group, saving now and saving regularly will make all the difference.
“The earlier you start saving, the easier it is ― really,” Huddleston said. “Thanks to the power of compounding, if you start regularly setting aside even small amounts as soon as you start working, you could easily have enough for a comfortable retirement.”
Saving as little as 5% of your income can make a big difference long term, Bonner added. “Make sure to always take advantage of any employer matches, and automatically transfer funds from your paycheck to your retirement fund so that you do not even think of that money as disposable income,” she said.
Gen X Still Playing Catch-Up on Retirement After Great Recession
Although some Gen Xers are hitting their retirement savings goals, just over half (52%) still have less than $10,000 in retirement savings. A big contributor to this low amount could be the Great Recession, which hit Gen X the hardest, costing members of this generation 45% of their net wealth on average, according to The Fiscal Times. This loss was a major setback for a generation that is saddled with a wide range of financial obligations, from mortgages to aging parents and children entering adulthood.
Younger Gen Xers are falling further behind on retirement savings than their older counterparts, who are twice as likely to have retirement savings with high balances:
- Both younger Gen Xers (ages 35 to 44) and older Gen Xers (45 to 54) are equally as likely to not have a retirement account, at 31%.
- Among younger Gen Xers who have a retirement account, most have lower balances of less than $50,000.
Older Gen Xers’ balances reflect good starting contributions that could earn considerable compound interest over time:
- An impressive 40% of older Gen Xers have managed to save $50,000 or more in retirement accounts.
- Over half of those older Gen Xers in that 40% have balances of $200,000 to $299,000 (7%) or $300,000 or more (15%).
“These figures are encouraging,” Huddleston said, “but this generation still could be setting aside a lot more if they actually want to have a comfortable retirement.”
Only 1 in 4 People Age 55 and Over Has More Than $300K Saved
As respondents get older, the gap between the savers and the save-nots widens. Although a larger portion of people age 55 and over report high-balance retirement funds, there remains a significant subgroup that has little to no retirement savings:
- About 3 in 10 of respondents age 55 and over have no retirement savings.
- 26% report retirement savings with balances of under $50,000, an amount that is insufficient for people nearing retirement age.
- Over half (54%) of people age 55 and over have balances far behind typical retirement fund benchmarks for their age group.
Some of those 55 and over who lack savings might not need them, Huddleston pointed out. “[They] might be among the dwindling group of Americans who will get a pension and will benefit from having an employer who set aside retirement funds for them.”
More likely, however, those without retirement savings couldn’t or didn’t make saving for retirement a financial priority. “Without savings of their own, they’ll have to rely solely on Social Security,” Huddleston said. Baby boomers most often cited Social Security as their expected primary source of retirement income (35%), according to a 2015 report from the Transamerica Center for Retirement Studies, whereas Gen X and millennials expected retirement accounts like 401ks or IRAs to be their main source of retirement income.
On the other end of the spectrum, many baby boomers and seniors have successfully socked away substantial savings in retirement accounts:
- 26% of baby boomers nearing retirement (ages 55 to 64) report healthy retirement savings with balances of $200,000 or more.
- 31 percent of seniors at or above the retirement age (65 and over) have balances of $200,000 or more.
“Those who have saved more than $300,000 have clearly made saving for retirement a priority and want a more comfortable lifestyle in retirement than what Social Security benefits will afford them,” Huddleston said.
About 75% of Americans Over 40 Are Behind on Saving for Retirement
Using this survey data as a snapshot of Americans’ retirement savings progress ― or lack thereof ― GoBankingRates sought to get a better look at how many people are actually on track to retire comfortably. To do so, GoBankingRates compared survey responses to key retirement savings benchmarks based on a savings rate of 5 percent of income and checkpoints sourced from J.P. Morgan Asset Management, as well as Census Bureau data on median incomes by age range. Based on those data sets, GoBankingRates determined that people of the following ages, representative of the survey age groups, are on track or behind at the following rates:
|Age||Median Income||Retirement Savings Benchmark||Percentage on Track||Percentage Behind|
|24||$34,605||Started a retirement fund||48%||52%|
A little less than half of people ages 18 to 24 are on track simply by having started a retirement fund. Among the people just a few years ahead of them, around age 30, significantly more ― two-thirds ― are already behind on saving for retirement.
Younger people are in the best position to recover if they’ve fallen behind because they have more time to use compound interest to their advantage. “Those who are in their 20s and 30s with $10,000 or less in retirement savings still have time to catch up if they make saving a priority,” Huddleston said.
For those age 40 and over, however, the picture is bleaker: Among those in their 40s and 50s, four in five savers have balances that fall behind the benchmarks for their age groups, which means only about 20 percent are on track for retirement. Among those 60 and over, about a quarter have sufficient retirement savings, but the other 74 percent are still behind.
Read More: 28 Retirement Mistakes People Make
“The real problem is procrastination,” Huddleston said. “People naturally tend to focus on the bills that are due today ― and the things they want now ― and assume they’ll have time to save for retirement later. But, before you know it, 20 or 30 years have passed; you’re approaching retirement age but you don’t have enough saved to retire.”
How to Catch Up If You’re Behind on Retirement Savings
With less time to save as each year passes, these older age groups need to reevaluate their financial priorities. The large majority of Americans age 40 and over who are behind on retirement savings can potentially catch up or compensate for their anemic retirement accounts by making changes to their savings plans now.
1. Stick to a Routine
The first step is to start saving regularly. Consistent savings, even in just small amounts, is the best way to ensure a retirement fund is growing. “Day to day, it might not seem as if the balance in your 401k or IRA is increasing significantly, but 10, 20, 30 years from now, your future self will be thanking you,” Bonner said.
If money is put into high-yield accounts or invested wisely, compound interest on small savings can help produce a sizable nest egg. “If you wait until you’re 40 or so to start saving, you’d have to save three or four times as much ― or more ― each month to accumulate the same amount as those who start saving earlier,” Huddleston said.
2. Prioritize Changes That Have Long-Term Benefits
Upping retirement savings contributions is also necessary to catch up. People age 50 and over can make catch-up contributions of $6,000 to a traditional 401k, for example, in addition to the regular $18,000 annual 401k contribution limit, according to the IRS.
Those nearing retirement can also help prepare for retirement by reducing spending and paying down debt, which will trim monthly expenses and enable them to stretch their savings further once they retire.
3. Save Like You’ll Retire Tomorrow
Lastly, those nearing retirement might need to adjust their expectations, Huddleston said. “Older Americans with little saved will have to work a lot harder to set aside more and likely will have to work longer ― or never fully retire,” she said.
Saving for an emergency
Emergencies, by their nature, are unpredictable. When they happen, they can derail your financial stability. A sudden illness or accident, unexpected job loss, or even a surprise home or car repair can devastate your family’s day-to-day cash flow if you aren’t prepared.
While emergencies can’t always be avoided, having emergency savings can take some of the financial sting out of dealing with these unexpected events.
What is an emergency fund?
An emergency fund is a separate savings or bank account used to cover or offset the expense of an unforeseen situation. It shouldn’t be considered a nest egg or calculated as part of a long-term savings plan for college tuition, a new car, or a vacation. Instead, this fund serves as a safety net, only to be tapped when an emergency occurs.
How much should you save?
While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months’ worth of expenses. This amount can seem daunting at first, but the idea is to put a small amount away each week or two to build up to that goal. You may also want to consider adjusting the amount based on your bill obligations, family needs, job stability, or other factors.
Where should you put the money?
Emergency savings are best placed in an interest-earning bank account, such as a money market or interest-earning savings account, that can be accessed easily without taxes or penalties. The concern with placing your emergency savings in mutual funds, stocks or other assets is that they may lose value if the funds need to be accessed quickly.
Emergency savings should be placed in an account that is easily accessible, so you do not incur early-withdrawal penalties as you would with an account such as a certificate of deposit (CD) or Individual Retirement Account (IRA).
When should you use this money?
The goal is to tap your emergency savings only for expenses directly related to an unexpected emergency. By setting a specific dollar amount that should be in that account, you will know how much to build up to. When you draw from the emergency savings, you’ll then know how much to contribute in order to replenish the account. When you do have to take money from this fund, it’s important to immediately start rebuilding it. Remember: If you start saving now, the money you save today can go a long way towards meeting your needs when the next emergency occurs.
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Wells Fargo Bank, N.A. Member FDIC.
When reviewing the data on how American workers are saving for retirement, two facts become abundantly clear:
- Millions of Americans are in danger of not having enough money to maintain their standard of living in retirement.
- The problem is getting worse over time.
The consequences of these growing savings shortfalls could be severe for both American families and the national economy, as a large share of households may be forced to significantly reduce consumption in retirement and will have to rely heavily on their families, charities, and the government for help to make ends meet. Rather than staying in control of their economic lives, millions of Americans may be forced to muddle through their final years partially dependent on others for financial support and to accept a standard of living significantly below that which they had envisioned.
This issue brief will illustrate the reality of this crisis by first looking at what the data have to say about how much money Americans are putting away for retirement. It will then evaluate the results of studies that use complex modeling to estimate what percentage of the population is at risk of falling short of achieving a financially stable retirement. What is made clear is that no matter how households’ needs in retirement are projected or how their incomes, assets, and debts are measured, an unacceptably large share of Americans appears at risk of being forced into a lower standard of living in retirement. The most convincing estimates of the share of households who will have insufficient assets stand at slightly more than 50 percent.But even more sobering is the fact that the most optimistic studies still find that nearly one-quarter of retirees are falling short.
Facts on the crisis
The data available on how American households build up financial assets and how they have done so over time show an American public that is struggling to prepare itself for retirement and that is becoming less well prepared over time. Three clear trends in particular illustrate to what extent Americans are underprepared for retirement.
A large percentage of Americans are saving nothing for retirement
According to a recently released household survey conducted by the Board of Governors of the Federal Reserve System, as of 2013, approximately 31 percent of Americans reported having zero retirement savings and lacking a defined-benefit, or DB, pension.This finding is in keeping with the results of other comprehensive Federal Reserve surveys and means that nearly one-third of people in the United States currently have no money put away in any type of retirement account to supplement their Social Security benefits.Among respondents ages 55 to 64—those nearest to retirement who already should have built up significant savings—the share who reported having no savings or pension was still 19 percent, or approximately one out of every five near-retirement households.
That such a large share of Americans lacks any savings should not be particularly surprising given that so many still lack access to the primary savings vehicles used by workers today: workplace retirement plans. As of 2014, only 65 percent of private-sector workers had access to a retirement plan through their jobs, and only 48 percent participated in one.Even when looking just at full-time workers, more than one-quarter still lacked access to an employer-sponsored retirement plan, and more than 40 percent did not participate in one.Moreover, these numbers have not been getting significantly better over time. In fact, studies that use data that allow for long-term analysis indicate that the share of private-sector workers with access to workplace plans is actually lower now than it was in the late 1980s.
Families that are saving often have insufficient assets
As traditional DB pensions become increasingly rare, it is more important for workers to build up savings in defined-contribution, or DC, plans such as 401(k)s or in nonemployer-based individual retirement accounts, or IRAs. Unfortunately, most households have failed to build up anywhere near enough in these accounts. As of 2013, the median retirement account balance among all households ages 55 to 64 was only $14,500. Even after excluding all households that had saved nothing, the median account balance of near-retirement households was still only $104,000.If a household uses all of this money to purchase an annuity from a life insurance company that will pay a guaranteed monthly income for the rest of the household’s life, this income will provide only approximately $5,000 per year in retirement—nowhere near what the household is likely to need.
These facts may seem somewhat confusing to those who know that the aggregate sum of savings in such plans has grown significantly over time and is indeed quite large, at more than $12.1 trillion in 2013.While this is an impressive sum, the distribution of these assets across households results in typical middle-class households having very low savings in their accounts. Simply put, the wealthy hold most of these assets, while the middle class and the poor have comparatively little. As of 2013, the top 20 percent of working-age households by income owned 67.7 percent of all retirement account assets, while the bottom 50 percent owned only 7.4 percent.Among older households, a study for the Social Security Administration found that only 19 percent of families headed by a person over age 65 were actually receiving distributions from a retirement account as of 2009, with only 8 percent of families in the bottom income quartile receiving any such distributions.
Households today should increase their savings relative to prior generations but they are not doing so
One simple way to measure how capable households will be of maintaining their standard of living in retirement is to look at the ratio of their total wealth to their income. This gives an idea of how much in total assets a family has built up relative to approximately how much they consume in a given year. As data from the Survey of Consumer Finances, or SCF, make clear, while these ratios did improve for older households during the 1990s and early 2000s—when the housing bubble was growing and stock markets were booming—they subsequently collapsed following the Great Recession and have shown no signs of recovering.All told, households near retirement age were worse off in 2013 than they were in 1989.Meanwhile, ratios for younger households showed almost no significant growth even when the economy was doing well during the late 1990s and early 2000s, and they have since fallen off significantly in recent years as well.This means that today, households across all age groups have wealth-to-income ratios that are effectively unchanged from or significantly below the ratios achieved by households in previous decades.
This is particularly worrisome given that during this time period, workers increasingly shifted away from DB pension plans—the assets of which are not measured by the SCF—to DC plans, the assets of which are measured.Even if households in more recent years built up the same amount of assets as households in previous years, the shift from DB to DC pension plans should have resulted in wealth-to-income ratios rising as the amount of unreported assets decreased.
This stagnation of wealth-to-income ratios might be fine if retirement needs had stayed the same over time, but as Alicia H. Munnell of the Center for Retirement Research at Boston College, or CRR, has previously explained in great detail, retirement needs have actually grown significantly in recent decades.Life expectancy has increased and the retirement age for full Social Security benefits has risen to age 67, meaning workers now have more years of expenses to cover but must wait longer to begin receiving full Social Security benefits.Health care costs also have risen substantially, resulting in higher expenditures for retirees, and the decline in real interest rates since 1983 means that a given amount of wealth accumulated today now produces less retirement income than it would have in previous decades.
For all of these reasons, workers should be approaching retirement with greater wealth relative to their income than did previous generations. The data, however, show the opposite is occurring, indicating that current workers are not as prepared for retirement and that increasing shares of younger generations may be forced to muddle through their retirements by continuing to work beyond when they intended, by relying on family and government programs for aid, or by significantly cutting back on their consumption.
How do all of these facts fit together?
All of these facts indicate that millions of American families are facing the very real prospect of not being able to maintain their standard of living in retirement and that the problem is growing worse over time. However, researchers and policymakers often want to provide a single number that quantifies exactly what share of Americans are at risk of having insufficient savings. Arriving at such a number requires the use of complex modeling, but it can be done.
A number of such analyses have been conducted in recent years, producing different estimates. The differences are primarily due to the differing assumptions built into each model and the ways in which some key variables are measured. (see the Appendix for additional details) This section looks at some of the most widely cited studies, including some of the most pessimistic and most optimistic, and describes what they show about the depth of the retirement crisis. What is clear from all of these analyses, however, is that no matter what assumptions or measures are used, an unacceptably large percent of Americans are at risk of having to decrease their standard of living in retirement, and the problem is only getting worse over time.
The pessimistic assessments
One of the most frequently cited examples of the more pessimistic estimates of Americans’ retirement preparedness comes from the National Institute on Retirement Security, or NIRS, in its report “The Retirement Savings Crisis: Is It Worse Than We Think?” This report uses industry recommended savings guidelines from the brokerage firm Fidelity Investments to assess what share of households are on track to hit an income replacement rate target—that is, the share of a household’s preretirement income that it needs to replace in retirement to maintain its standard of living—of 85 percent. When assessing households’ readiness using the broadest measure of household resources—net worth—the report found that 65 percent of households between ages 25 and 64 were at risk of not meeting their retirement savings target as of 2010.
Notably, the share deemed to be at risk increases as households become younger, growing from 67.8 percent of those ages 55 to 64, to 69.8 percent of those ages 45 to 54, to 70.1 percent of those ages 35 to 44.It then falls significantly to 51.1 percent of households ages 25 to 34, but as the report itself notes, the estimate for this age group should be approached with extreme caution, as assessing the preparedness of workers this far from retirement is extremely difficult, and the low estimate is largely the product of the disproportionately low savings target set for this group by the Fidelity Investments savings benchmarks that NIRS uses.
Some factors likely result in this study’s findings being potentially somewhat pessimistic.First, the income replacement rate target used—85 percent—is at the high end of standard replacement rate recommendations.Second, the use of a single target rate for all households does not take into account that households with different characteristics may require different replacement rates. Finally, the use of a single schedule of savings targets at each age to measure whether households are on track does not account for the fact that households could potentially use different saving pathways and still end up with the same amount of money in retirement.
It is important to note, however, that a number of these methodological choices, such as using a single target income replacement rate, are not unique to the NIRS analysis and, indeed, are used in numerous other assessments of retirement preparedness as well. Additionally, in follow-up publications, NIRS has shown that even when using more conservative savings targets, the share of households it finds to be at risk remains very high.Furthermore, it has illustrated that while savings pathways that backload savings into a worker’s later years may also be capable of achieving similar wealth targets at retirement, they can often be extremely difficult to realistically pursue.
Overall, the estimate that 65 percent of American households are at risk is potentially pessimistic and represents a higher-end estimate of the share of the American population that may fall short in retirement. That being said, the NIRS analysis is useful for illustrating in transparent and easy-to-understand terms how American households stack up against the very standards—those put forward by industry professionals—they will likely be using to assess their own retirement preparedness. Additionally, its findings underscore the fact that retirement preparedness is generally getting worse among younger households.
The optimistic assessments
At the other end of the spectrum is a group of studies that uses more complex modeling and that is more frequently cited by those who take a more optimistic view of the retirement crisis’ severity.These studies’ results generally paint a somewhat less negative picture than do the results of similar studies conducted by organizations such as the Center for Retirement Research, discussed below, due to their adoption of alternative assumptions about household consumption patterns and their preference for alternative measures of preretirement income. Most important, however, is that despite their adoption of these alternative assumptions and measures—the validities of which are still very much in contention—these best-case-scenario analyses still indicate that an unacceptably large share of American households may be forced to lower their standard of living in retirement and that the problem is growing over time.
Among the primary studies often cited by those seeking to paint a more optimistic picture of Americans’ retirement preparedness is a 2012 study by Barbara A. Butrica, Karen E. Smith, and Howard M. Iams that uses a microsimulation model—the Modeling Income in the Near Term, or MINT, model, which is maintained by the Social Security Administration—to calculate to what extent individual households will be able to replace their preretirement incomes in retirement.While not calculating what share of each generation is at risk per se, the study provides a distribution of projected replacement rates for five generations of workers. The numbers often cited from this study are the seemingly impressive median replacement rates calculated for each generation, which range from 84 percent to 98 percent when using the preferable wage-adjusted measure of lifetime earnings (see text box on the next page) and from 109 percent to 119 percent when using price-adjusted earnings that are less appropriate for determining whether a worker will be able to maintain his or her standard of living in retirement.
Why use wage indexing over price indexing?
When calculating what percentage of an individual’s preretirement income will be replaced in retirement, a key part of the calculation is the measure of preretirement income used. Many studies use an average of a worker’s lifetime earnings, but the question then becomes whether previous years’ incomes should be adjusted using a price index or a wage index.
An easy way to think of the differences between using either option is to imagine if a worker’s retirement income target were hypothetically determined using only an average of their first and last years of earnings. For the purposes of this example, let’s say a worker’s first year of earnings was 1973; her last year was 2013; and that in both years she earned exactly the median income, meaning that she was firmly in the middle class.
Putting this worker’s 1973 income into 2013 dollars using a price index would only tell us how much money she would need today to purchase the same bundle of goods she could afford in 1973. While that bundle of goods was associated with a middle-class standard of living that year, the U.S. economy has grown significantly since then, above and beyond price inflation. This is due to increases in productivity, meaning that today’s middle-class standard of living is much improved from what was considered middle class just four decades ago. Consequently, if this worker’s price-adjusted 1973 income were simply averaged with her 2013 income and used to set her retirement income target, this would effectively be saying that she should significantly slash her current levels of consumption and adopt a lower standard of living that is somewhere between what was considered middle class four decades ago and what is considered middle class today.
Using a wage index to adjust her 1973 earnings, however, would tell us how much money she would need today to afford the same relative level of consumption she enjoyed 40 years ago. In other words, since she was earning a middle-class income by 1973 standards, it would tell us what income she would need today to continue being middle class. If this figure and her 2013 income were used to set her retirement income target, it would result in the use of a target that truly attempted to maintain the standard of living she actually experienced over her lifetime—that of a middle-class American—as opposed to a standard of living based on how much she consumed in absolute terms decades earlier.
Of course, the models actually used to determine replacement rates for current workers do not use only two years’ incomes, but the same logic applies when adjusting all of a worker’s past earnings. While price indexing certainly has a role in certain academic research, for the reasons outlined above, we believe that using wage indexing provides estimates of retirement needs that are far more reflective of workers’ standards of living in the long run.
More important, however, is what the Butrica, Smith, and Iams study shows about the share of workers likely to fall short in retirement. When using wage-indexed lifetime earnings, the share of workers projected to have income replacement rates below 75 percent—a reasonable approximation of the minimum recommendations of most academics and industry professionals—ranges from 34 percent of the War Baby cohort, or those born between 1936 and 1945, to a full 43 percent of Gen Xers, or those born between 1966 and 1975. The share of workers projected to have replacement rates below 50 percent ranges from 13 percent of older workers all the way up to 18 percent of the youngest workers.
In other words, the study shows that depending on the generation examined, between three and four out of every 10 workers will potentially have to lower their standard of living in retirement, and nearly one out of every five of the youngest workers may have to cut their consumption severely.
A second study often cited by more optimistic assessments of the retirement crisis is one by William G. Gale, John Karl Scholz, and Ananth Seshadri.This study differs from more pessimistic analyses in its use of alternative assumptions about how children leaving the home affects household consumption and to what extent retirees will continue to reduce their consumption in their later years beyond the amount by which they reduce it when they first enter retirement. (see text box on the next page) It also uses data on current retirees instead of data on current workers to gauge the share of Americans falling short in retirement.
While the original paper published by Scholz, Seshadri, and Surachai Khitatrakun in 2006 used 1992 data to estimate the share of the so-called Health and Retirement Study, or HRS, cohort—those born between 1931 and 1941—falling below their optimal wealth targets, a 2009 working paper update written with Gale provides preliminary estimates for three additional cohorts using 2004 data.The most notable figure from this update is that 25.9 percent of the total sample was found to have insufficient assets, with the median shortfall faced standing at $32,260 in 2004 dollars.
While this estimate does at first appear to be significantly lower than those produced by other sources, it still speaks to the existence of a significant retirement savings shortfall that will affect millions of American families.If the study by Gale, Scholz, and Seshadri represents a best-case scenario, than that best-case scenario is that more than one out of every four retired people examined had insufficient retirement income to maintain their standard of living. Significantly, this estimate was produced using data from before the onset of the Great Recession, which wreaked havoc on Americans’ savings and net worth. Furthermore, although this study does not look at current workers, the results show that the share of Americans at risk is growing with each successive generation of past retirees. Again, this indicates that the problem is becoming worse over time. Saying that this does not constitute a retirement crisis would be similar to saying the country would not be facing a housing crisis if one out of every four American families were found to be in danger of losing their home and that share was only projected to grow over time.
Assumptions concerning household consumption, children, and aging
At the heart of the differences between the models used by researchers such as Gale, Scholz, and Seshadri and those used by organizations such as the CRR are differing assumptions concerning how household consumption changes over time.
First, whether or not households are assumed to decrease their consumption after children move out of the home can significantly affect estimates of the share of households at risk. This is because if households do decrease their consumption, they can save more and will have a lower level of average consumption to replace in retirement, both of which will result in their appearing better prepared for retirement. If parents simply shift the expenditures they were making on their children to other forms of consumption—for example, while raising children they made financial sacrifices that only temporarily reduced their standard of living—they will continue saving at their previous rates and will need additional assets in retirement to maintain their current level of consumption. Studies such the one by Gale, Scholz, and Seshadri adopt the former assumption, while analyses by organizations such as the CRR adopt the latter.
Second, while almost all analyses assume that households will initially lower their level of consumption when they first enter retirement (see Appendix), whether or not households accept gradual decreases in their level of consumption as they move through retirement beyond this initial drop-off also significantly impacts the share of households appearing at risk. This is simply because if retirees are consuming less in total, they will need to have accumulated fewer assets to fund this consumption. Studies such as the one by Gale, Scholz, and Seshadri do assume that retirees will reduce their consumption willingly over time beyond the initial decrease they experience when they first retire, while models such as the one used by the CRR generally assume retirees will maintain a constant level of consumption throughout retirement following the initial decrease.
However, as Alicia H. Munnell, Matthew S. Rutledge, and Anthony Webb of the CRR make clear in a recent paper, what is extremely important about all of these assumptions is that they remain unsettled in the academic literature.For example, while some studies do show consumption gradually declining during retirement, it is unclear to what extent this is a product of declining consumption needs versus declining retirement incomes. There is also no preponderance of evidence that shows that households cut expenditures after children leave the home; while some studies show that households can and do cut consumption, others find the opposite. Moreover, there is significant debate over how much money future retirees will have to spend on health care and long-term care, and higher anticipated expenditures in these categories could significantly affect projected spending needs. (see Appendix)
Which of these assumptions researchers feel are more plausible will determine in part whether they gravitate toward more optimistic studies, more pessimistic studies, or those that fall in the middle. That said, as this issue brief illustrates, no matter which of these assessments is preferred, an unacceptably high share of the American public appears at risk of having to lower their standard of living in retirement, and the scope of the problem only appears to be getting larger over time.
But of greatest concern is that the youngest generation looked at by Gale, Scholz, and Seshadri are War Babies—defined in the study as those born between 1942 and 1947—who, according to multiple other analyses, are likely the generation best prepared for retirement.If 28.1 percent of this generation, who were able to build up their savings during one of the best stock markets in U.S. history and who enjoyed significantly greater access to defined-benefit pensions, are estimated to have insufficient resources, it bodes very poorly for younger generations who other studies frequently find to be significantly less prepared for retirement.In other words, it appears quite possible that even given the more optimistic assumptions used by the study, the share of people currently in the labor force at risk of not being able to maintain their standard of living in retirement may be well above 25.9 percent, and the savings shortfalls they face may well be significantly larger.
A middle ground: The National Retirement Risk Index
Falling in between these more optimistic and pessimistic studies is the National Retirement Risk Index, or NRRI, produced by the CRR. The NRRI measures the share of households younger than 65 years of age who are unlikely to be able to maintain their standard of living in retirement based on expected income from Social Security; DB pensions; and individual savings, including money in 401(k) plans, individual retirement accounts, and home equity. It takes into account individual households’ unique needs by adjusting target income replacement rates based on past income, and it calculates achieved replacement rates relative to a preferable wage-indexed average of lifetime earnings rather than a price-indexed average.
The NRRI shows the share of households at risk as of 2013—the last year for which an estimate is available—at 52 percent, which is up significantly from the 31 percent of households that were estimated to be at risk in 1983.Just as important is that—as is the case in the other studies examined—younger workers are again projected to be significantly less well prepared for retirement. The share of households ages 30 to 39 deemed to be at risk is 59 percent, compared with 52 percent of those households ages 40 to 49 and 45 percent of households ages 50 to 59.
Importantly, a number of assumptions built into the NRRI prevent it from being overly pessimistic and may actually lead it to underestimate the share of households at risk. First, it is assumed that all households will liquidate all of their assets in retirement, including their homes via reverse mortgages, and that all households will use their savings to purchase annuities that will provide them with steady checks through the end of their lives. The vast majority of households, however, do neither of these things. The NRRI also only labels households as “at risk” if they are projected to fall at least 10 percent below their income replacement rate target, and it assumes all households will work until age 65, despite the fact that many workers retire earlier and consequently receive reduced annual Social Security benefits.All of these assumptions tend to make the NRRI’s findings more optimistic.
Finally, the NRRI also does not account for long-term care costs or explicitly account for health care costs as costs that are separate from and on top of retired households’ other core expenditures. It assumes that if households need to pay for health care in retirement, they can simply decrease their consumption of other goods and services by an amount equivalent to their health care expenditures, and it assumes households do not purchase long-term care insurance. The CRR found that when it did explicitly account for these costs, the share of households it deemed to be at risk increased substantially. Indeed, the NRRI estimate for 2006—the last year for which this comparison was done—rose from 44 percent at risk all the way to 64 percent at risk.
No matter how one approaches assessing the retirement preparedness of the American public, the facts of the matter remain the same: A large percentage of Americans are not building up sufficient assets needed to maintain their standard of living in retirement, and the problem is only getting worse for younger generations. While studies that utilize different methodologies may arrive at different estimates of the exact percentage of Americans at risk of struggling financially in retirement, even the most optimistic, which use prerecession data, still find that approximately one-quarter of retired Americans are falling short and that preparedness is growing worse over time. The most middle-of-the-road estimates available place the share of current American workers at risk at more than 50 percent.
As America’s population ages, the economic well-being of retirees and their families will be increasingly important to the overall health of the national economy. To secure economic independence and dignity in retirement for all American families, it is imperative to address all of the elements of the middle-class squeeze that is making it more difficult for working families to find the money to save for retirement. It is also necessary to address the failings of the nation’s current retirement system.To shore up the retirement system, the Center for American Progress has proposed a number of reforms in its report “The Middle-Class Squeeze.” These reforms include:
- Encouraging the adoption of hybrid retirement plans—such as CAP’s Safe, Accessible, Flexible, and Efficient, or SAFE, Retirement Plan—at both the state and national levels
- Increasing access to existing alternative savings options such as the low-cost Thrift Savings PlanRequiring 401(k) and individual retirement accounts to be more transparent about fees and investment practices
- Making tax incentives for saving simpler and fairer by replacing existing tax deductions with a Universal Savings Credit and introducing a progressive match for low-income savers’ contributions
Only by making such significant changes to America’s existing retirement system can we ensure that all retirees are able to avoid economic dependency and truly enjoy the retirement they have been looking forward to and deserve.
Any attempt to project the share of American households that will be at risk of not having sufficient resources in retirement requires making a number of methodological choices and adopting numerous assumptions. While which data sources are utilized will have an impact on studies’ findings, it is often differences related to these methodologies and assumptions that are responsible for the most significant disparities between alternative analyses’ findings. This appendix provides a brief overview of the most important differences that have not already been described above and illustrates exactly how the choices made can determine the extent to which a study’s estimates are optimistic or pessimistic.
Replacement rate targets
A household’s income replacement rate target is the percentage of preretirement income it requires in retirement in order to maintain its preretirement standard of living. Whether a household is on track to hit this target is a frequently used measure for determining whether that household is at risk or not. Studies that assume households will need to replace a higher share of their income in retirement will—holding all else equal—generally find that a higher share of households are at risk, while studies assuming lower required income replacement rates will generally find a lower share of households to be at risk.
Almost all studies that utilize target replacement rates adopt targets that are below 100 percent, meaning that households are assumed to need less money in retirement to maintain their current level of consumption than they needed while working. As described in a 2012 paper published by the Social Security Administration, the three primary reasons for this assumption are: “Income taxes are lower in retirement because income is typically lower, and because some sources of retirement income, such as Social Security benefits, are taxed at lower rates than earnings;” “[r]etirees no longer need to save for retirement or, usually, for their children’s education;” and “[w]ork-related expenses are substantially reduced or eliminated altogether.”
The income range needed in retirement that most academic and industry recommendations fall into is between 60 percent and 90 percent of preretirement income.
Importantly, however, these recommended rates vary in a number of key ways. Academic studies that utilize more complex models are now more frequently attempting to account for the fact that required replacement rates may be different for households with different characteristics. Characteristics that are sometimes taken into account include household preretirement income levels, individuals’ marital status, and how many earners live in a household.Industry recommendations are far less likely to take these kinds of differences into account when setting target replacement rates, as their goal is generally to provide more simplistic rules of thumb for all households to utilize while saving.
The studies described above that explicitly use target replacement rates to gauge household preparedness are the estimates produced by the Center for Retirement Research and the National Institute on Retirement Security. NIRS utilizes industry recommendations that incorporate a single 85 percent replacement rate target for all households.The CRR utilizes replacement rate targets that vary depending on individual household characteristics but that average to 73 percent for working-age households.The study by Gale, Scholz, and Seshadri, on the other hand, does not use income replacement rate targets to gauge retirement preparedness but instead uses specific wealth targets calculated for individual households using a life cycle model and data on their earnings histories.
Calculating preretirement income
Essential for calculating replacement rates is the measure of preretirement income selected. Studies of retirement preparedness vary in how far back they look when calculating preretirement income and in which types of income they include in their totals. Analyses that utilize higher measures of preretirement income generally find a larger share of households to be at risk, since replacing an identical percentage of a higher income total will require the accumulation of more assets.
First, studies differ in terms of whether they consider preretirement income to refer to income earned only in the year or years directly preceding retirement or to an average of workers’ incomes over a longer period of time. The justification for using the former is that it is perhaps a more accurate estimate of the level of consumption being enjoyed by a household at the exact moment it exits the labor force. The justification for using the latter is that earnings in a single year or a small number of years directly preceding retirement can be relatively volatile—especially since many households may not retire all at once and may instead opt to gradually lower their working hours in the years prior to their retirement—and consequently may not reflect the standard of living a household has actually become accustomed to during its working years as accurately as a longer-term average can. Which method produces a higher estimate of preretirement income will depend on a number of factors, including whether years of zero earnings are included and exactly how many years are used to calculate an average earnings measure.
The second issue on which studies differ when estimating preretirement income is whether or not income totals should include sources of income beyond earnings—that is, wages, salary, and self-employment income—such as capital income and imputed rental income.While some studies choose to only count earned income, others choose to count additional sources of income as well, which serves to increase income totals and may consequently increase the share of households deemed to be at risk, since households would then have to save more money to hit the same income replacement rate. Those who prefer more limited measures of income may do so because they believe forms of income such as capital income are not as frequently used to fund preretirement consumption as is earned income. Those who advocate for the inclusion of income sources beyond earnings generally maintain that households do take these income streams into account and utilize them when making consumption decisions, and consequently, this income cannot be ignored when attempting to measure overall preretirement consumption.
Looking at the studies described above, both the analysis by Butrica, Smith, and Iams and the CRR’s National Retirement Risk Index calculations utilize longer-term income averages. Butrica, Smith, and Iams use an average of a person’s 35 highest-earning years—excluding co-resident income and imputed rental income—as their measure of preretirement income, while the CRR defines preretirement income as the average of household lifetime earnings including capital income and imputed rental income. The NIRS study uses replacement rate targets that consider preretirement income to be only the income earned by a household directly preceding retirement, and the Survey of Consumer Finances income measure it utilizes includes both earned income and income from all other sources, including capital income.Finally, Gale, Scholz, and Seshadri do not use replacement rates in the same manner the other studies do, instead using records of lifetime earnings to help calculate optimal wealth targets for individual households.The lifetime earnings measures they use are drawn from Social Security earnings records that record only wage, salary, and self-employment income.
How households draw down wealth in retirement
Also of great importance is how households will spend their assets in retirement. Whether it is assumed that households will liquidate the entirety of their assets to support consumption in retirement, as well as whether households are assumed to purchase products such as annuities to manage the long-term drawdown of their savings, will have a significant impact on the share of households deemed to be at risk. Generally speaking, those analyses that assume households will liquidate a larger share of their net worth and that assume that households will purchase products that protect them against longevity risk—that is, the risk of outliving one’s savings—find a lower percentage of households to be in danger of not having enough money in retirement.
The first assumption that must be made is whether households liquidate the entirety of their wealth—and their housing wealth in particular—so as to pay for consumption in retirement. If households are assumed to draw on that equity in retirement via tools such as a reverse mortgage, it will make them appear to have far more assets available than otherwise. If households are assumed not to liquidate the entirety of their assets—as seems far more likely given the fact that very few households actually make use of reverse mortgages—the assets available to them will be substantially lower, and consequently, the share of households considered at risk will rise.
The second important assumption that must be made is whether households choose to purchase annuities or to self-manage their savings in retirement. If households are assumed to purchase annuities that convert their assets into a lifetime stream of income that does not run out until the purchaser dies, they will generally appear somewhat better off, as research has indicated that doing so will enable them to more efficiently maintain their standard of living in retirement than would some of the more commonly adopted self-management strategies.Again, however, making this assumption is optimistic, as the vast majority of households do not actually purchase annuities in retirement despite their usefulness for managing longevity risk.
All analyses considered above assume that housing wealth will support consumption in retirement in some fashion. The studies conducted by NIRS; the CRR; and Gale, Scholz, and Seshadri all assume that home equity can be drawn on via tools such as reverse mortgages.Butrica, Smith, and Iams use a rate of return to convert home equity into imputed rental income, which they then count in their measure of postretirement income, and the CRR also counts imputed rental income in its retirement income total.On the issue of purchasing annuities, the CRR assumes that all households will annuitize all the financial and housing assets possible, while Butrica, Smith, and Iams assume individuals will annuitize the majority of nonpension, nonhousing wealth. Gale, Scholz, and Seshadri do not assume that households will annuitize their assets and instead assume that households will draw down their wealth over the course of their retirement in a theoretically optimal way in which households carefully balance the risks of burning through the entirety of their wealth before they die with the risk of needlessly limiting their consumption during retirement.
While not explicitly related to households’ drawing down of their own wealth, it should also be noted that these analyses—like almost all studies of retirement preparedness—generally assume that households will receive the entirety of the Social Security benefits they are entitled to under current law. If Social Security benefits were to be reduced in the future, it would likely significantly decrease retirees’ projected income replacement rates, and far more households would be placed at risk of not having enough money in retirement.
Health care costs
Whether studies incorporate estimates of out-of-pocket retiree health care spending can significantly impact their estimates of the share of households at risk. All else being equal, studies that anticipate higher medical spending by retirees and/or more rapid growth in this spending over time will generally find a higher share of the population to be at risk of having insufficient retirement assets than studies that anticipate less spending or cost growth, since this represents an additional cost that retired households must cover using their limited savings.
Accounting accurately for these costs is extremely important because retirees’ out-of-pocket medical expenditures have grown significantly in recent decades and are anticipated to continue growing at a relatively fast pace.This is largely because while Medicare does cover 62 percent of health care costs for Medicare beneficiaries ages 65 and older, out-of-pocket spending still covers approximately 13 percent, and private insurance—now often fully paid for by retirees—accounts for roughly 15 percent. Consequently, rising health care costs are directly affecting seniors’ bottom lines, since they are still covering a significant portion of their health care costs in retirement themselves.
Indeed, the Employee Benefit Research Institute estimates that as of 2014, a married couple with Medicare who have median prescription drug expenses and who purchase Medigap Plan F coverage and Medicare Part D outpatient drug benefits to supplement Medicare will still need to save approximately $241,000 to have a 90 percent chance of having enough money to just cover their medical expenses in retirement.Similarly, Fidelity Investments estimates that a 65-year-old couple retiring in 2014 will require an average of $220,000 to cover medical expenditures in retirement, excluding most dental care and over-the-counter medication costs.And both of these estimates do not even account for the projected costs of the long-term care that many households may require in the future but for which the majority of households have not purchased insurance. Given that the median retirement account balance of households ages 55 to 64 was only $14,500 in 2013, many households will have a very difficult time coming up with the funds necessary to cover these costs.
The studies examined in this paper take very different approaches to accounting for out-of-pocket medical expenditures. The NIRS analysis does not appear to explicitly account for rising health care costs or the costs of long-term care. The CRR analysis treats medical expenditures as another form of consumption that is interchangeable with the consumption of other goods and services, meaning that if households encounter a significant medical event it is assumed that they can simply reduce spending on other forms of consumption to cover these costs.Their analysis also does not account for long-term care costs and does not assume that households must purchase long-term care insurance. The CRR, however, has noted that this treatment of medical costs potentially results in its understatement of the share of households at risk, since many households will require long-term care services and since many retirees will not be able to simply shift their consumption away from other goods and services and into medical services when a medical shock is experienced. The CRR found that when it did account explicitly for these costs, the at-risk proportion increased substantially, from 44 percent of all households in 2006—the last year for which the comparison was made—to 64 percent of all households.
Gale, Scholz, and Seshadri’s model accounts for the potential for out-of-pocket medical expense shocks when calculating households’ optimal wealth targets.However, the size of these anticipated shocks is based on historical data from past surveys of retirees and workers that do not account for the projected growth of medical expenses and, consequently, that may serve as a poor measure of the out-of-pocket costs future retirees will face.To address this concern, the original study conducted a sensitivity analysis that allowed for the possibility of households facing additional large medical expenses and found that this significantly increased the estimate of the share of households failing to meet their wealth target in 1992, from approximately 15.6 percent of households to 20.5 percent of households.
Keith Miller is a Senior Research Associate with the Economic Policy team at the Center for American Progress. David Madland is the Managing Director of the Economic Policy team at the Center. Christian E. Weller is a Senior Fellow at the Center and a professor in the Department of Public Policy and Public Affairs at the McCormack Graduate School of Policy and Global Studies at the University of Massachusetts Boston.
College Savings Statistics
Last Updated: October 13, 2021 by Melanie Hanson
Report Highlights. As the cost of a college education increases so too is the amount of money parents are saving for college – nearly $2,118 more in the last 5 years.
- Americans on average want to save $57,981 for their child’s college expenses.
- On average, parents saved $5,143 last year for their kid’s college.
- 30% of saving accounts are 529 plans – the largest majority.
- On average, Americans have saved $28,679 in their 529 accounts.
Americans generally put only 40% of their college savings into a college specific savings account. The amount of savings parents put into their child’s college account highly depends on income level as well as race. Only a minority of families that save for college speak to their child about cost-reduction strategies.
- On average, parents save $5,143 annually for their kid’s college.
- 39% of parents have talked with their child about how cost may affect which college they can afford.
- 26% of parents have discussed whether their child will live at home or at school based on the cost of the college.
- 86% of families use parental savings accounts to help pay for college.
- 49% of families use student savings accounts to help pay for college.
Parental Saving Statistics
As the main driving force behind college savings, nearly 2/3rds of parents who expect their child to attend college are saving or creating plans to cover the costs. Parents do not typically consult financial experts on how to save for college. As a result, parents may overestimate how much of the cost they can actually cover.
- 64% of parents are either saving, planning or doing both for college.
- 36% of parents are neither planning nor saving.
- 69% of families will not use retirement savings for college.
- 21% of families will use retirement savings if needed.
- Americans seek to save $55,342 on average for their child’s college expenses.
- On average, parents expect to pay roughly 30% of their child’s college expenses.
- On average, parents actually pay 10% of their child’s college expenses.
Also known as Qualified Tuition Programs, 529 Plans derive their name from section 529 of the IRS tax code. Each state except Wyoming has its own iteration of the 529 Plan. There are two types of 529 Plans – savings plans and prepaid tuition plans.
- There are 14.83 million 529 accounts in the nation.
- Those 14.83 million accounts amount to $425.2 billion.
- On average, Americans have saved $28,679 in their 529 accounts.
- There are 7,607 private accounts associated with national college 529 Plans.
- The 7,607 accounts amount to $410.6 million.
- 38% of parents were aware of 529 plans.
- Consequently, 54% of parents were unaware of 529 plans.
|State||Number of 529 Accounts||Total Cash Amount|
Other Savings Accounts
For this section, the type of education savings account being referred to is a Coverdell account. Another account used for college savings is an IRA – this stands for investment retirement account. Traditionally used for retirement, IRA’s can also be used for college savings. Traditional savings accounts are also used for college savings, they offer the most flexibility with how the funds can be used – they need not be spent strictly for educational expenses.
- Coverdell ESA assets have invested $7 billion in mutual funds.
- In 2013, 6% of individuals between the ages of 25-55 made unpenalized early withdrawals from their IRA’s – higher education was cited as a reason for early withdrawals.
- The 6% of individuals between the ages of 25-55′ withdrew roughly $20 billion.
- Americans on average save $226 annually in CD accounts for college.
- Americans on average save $99 annually in cryptocurrency for college.
- Americans save on average $1,008 a year in general savings accounts for their child’s college.
- Parents save $411 annually in investment accounts.
Racial Saving Statistics
This dataset covers statistics for White, Black, and Hispanic populations. On average, White families have more money saved up for college followed by Black families and then Hispanic families.
- 31% of White families’ college saving funds are in 529 accounts.
- 17% of Black families’ college saving funds are in 529 accounts.
- 17% of Hispanic families’ college saving funds are in 529 accounts.
- White families seek to save $55,124 for college.
- Black families seek to save $56,541 for college.
- Hispanic families seek to save $41,204 for college.
- White families save on average $6,211 annually for college.
- Black families save on average $4,079 annually for college.
- Hispanic families save on average $3,930 annually for college.
Savings by Family Education Level
In general, the higher the parents’ education level, the more they will save for their child’s future college expenses. Education level also affected how much parents think they need to save to secure their child’s college expenses.
- Parents without a college degree predominantly invest in pre-paid plans – roughly 26%.
- Parents with an Associate’s degree mostly invest in 529 plans – 13% of them.
- Parents with a Bachelor’s degree mostly invest in 529 plans – 38% of them.
- Without a degree, families seek to save $35,984 for their kids’ college.
- With an Associate’s degree, families seek to save $32,091 for their kids’ college.
- With a Bachelor’s degree, families seek to save $74,767 for their kids’ college.
- Parents without a college degree save $4,338 annually.
- Parents with an Associate’s degree save $5,499 annually.
- Parents with a Bachelor’s degree save $6,978 annually.
|Education Level||Confident||Not Confident|
College Saving Strategies
Some families implement strategies in order to save on the cost of college. The most popular strategy is to save money – which 75% of Americans implement.
- 22% of families plan to pay for college using life insurance.
- 14% of families plan to pay for college by finishing off their mortgage and freeing their income towards college expenses.
- 7% of families plan for their child to be employed with the college their child goes to.
- 14% of American families plan to save for college by limiting their choices to the most affordable colleges.
- 23% plan to save using research grants.
- 31% plan to save by budgeting the money they currently have.
- 4% expect to save money by applying for scholarships.
- Federal Reserve: Saving for College and Section 529 Plans
- College Savings Plan Network: 529 Plan Data
- FedFinancial Federal Credit Union: How Much Should I Save For College Calculator?’
- EdChoice: Education Savings Accounts (ESAs)
- Urban Institute: Understanding College Affordability, Covering Expenses, Savings’
- Congressional Research Service Report, Individual Retirement Account (IRA) Ownership: Data and Policy Issues
- Financial Industry Regulatory Authority (FINRA): ESAs and Custodial Accounts
- Sallie Mae 2020: How America Pays for College
- Sallie Mae 2018: How America Saves for College
Survey: 69% of Americans Have Less Than $1,000 in Savings
Banking / Savings Account
Motortion / Getty Images/iStockphoto
Despite a strong economy, a majority of Americans seem to be struggling to save money, according to GOBankingRates’ sixth annual savings survey.
Since 2014, GOBankingRates has polled Americans to find out how much they have in a savings account. This year, GOBankingRates asked adults from across the U.S. six questions to learn about their savings habits and what obstacles are keeping them from saving more. The results show that, compared with previous year’s findings, there’s a growing percentage of people with little to no savings. In 2019, 69% of respondents said they have less than $1,000 in a savings account compared with 58% in 2018.
“It’s puzzling to me that if the economy is doing so well and that we’re so close to full employment, that consumer confidence is up … that we haven’t seen the numbers move much in people’s ability to save,” said Bruce McClary, spokesman for the National Foundation for Credit Counseling, which conducts an annual financial literacy survey.
- Almost half of respondents — 45% — said they have $0 in a savings account. Another 24% said they have less than $1,000 in savings.
- The top reason respondents said they weren’t saving more was because they were living paycheck to paycheck. Nearly 33% said this obstacle was keeping them from saving, and about 20% said a high cost of living prevented them from saving more.
- The No. 1 thing respondents said they need to save more money was a higher salary. About 38% said having a bigger paycheck would help them save more, while 18% said lowering their debt would make it easier to set aside cash.
- The most common place where those with savings put their cash is in a savings account. Although 33% of respondents said they take advantage of a savings account to store their cash, 29% said they don’t have any savings.
Nearly 70% of Americans Have Less Than $1,000 in a Savings Account
The survey found that setting aside money seemed to be harder for Americans in 2019. In 2017, 57% of respondents said they had less than $1,000 in savings. That percentage edged up slightly to 58% in 2018.
This year, it shot up to 69%. Included in that figure are the 45% of respondents who have absolutely nothing in a savings account. The percentage of respondents with $0 in savings hasn’t been that high since 2014, when GOBankingRates conducted its first savings survey.
“I find it very troubling that people can’t come up with $1,000 in a savings account to cover expenses without borrowing money,” McClary said. In fact, having $1,000 in savings wouldn’t create enough of a cushion to cover many emergency expenses. That amount would just be “the starting point in the journey for achieving financial security — it shouldn’t be the final goal,” McClary said.
|How Much Money Do You Have in Your Savings Account?|
|Demographic||$0||Less than $1,000||$1,000-$4,999||$5,000-$9,999||$10,000-$19,999||$20,000-$49,999||$50,000 or more|
Women and middle-aged adults appear to be having the most trouble saving money. The survey found that 51% of women versus 38% of men have $0 in a savings account. And 53% of respondents ages 45 to 54 have no savings — the highest percentage of any age group.
A Quarter of Americans Are Focused on Retirement Savings
In addition to finding out how much (or how little) Americans have in savings, the survey sought to explore why people are saving. When asked what they are primarily saving for in 2020, 26% of respondents said “retirement” — making it the top savings goal.
Older adults were much more likely to be saving for retirement than younger respondents — with 74% of respondents ages 55 and older saying they were primarily saving for retirement. Men were slightly more likely than women to be saving for retirement — 28% versus 23%.
Boosting retirement savings is a great goal. But it can be risky to build a nest egg without first creating an emergency fund, McClary said. Without cash for unexpected expenses, people end up raiding their retirement accounts — which is a big mistake because you have to pay an early withdrawal penalty and taxes on the amount you take out of a retirement account such as a 401(k) or IRA, he said.
The survey found that 19% of respondents are saving for an emergency fund, making it the second-most popular savings goal after retirement. The survey also found that Americans are more likely to be saving for a vacation than for a car, home or an education.
Cost of Living Is Keeping Americans Down
One of the top reasons respondents said they aren’t saving more is because the cost of living is high where they are. It seems to be more of a problem this year, with 20% of respondents saying cost of living was an obstacle to saving compared with 18% in 2018.
“[Cost of living] is a legitimate obstacle for people in parts of the country,” McClary said. As the cost of living rises in many cities, people’s budgets are getting tighter and tighter, leaving them with less cash to set aside for savings.
However, the biggest obstacle to saving is living paycheck to paycheck. Nearly 33% of respondents said this was preventing them from saving more — up slightly from 31% in 2018.
Adults ages 35 to 44 were the most likely — at 40% — to say that living paycheck to paycheck was keeping them from saving more. And women were much more likely than men to be facing this obstacle — 38% versus 27%.
|What Obstacle(s) Are Keeping You From Saving More Money?|
|I’m living paycheck to paycheck||38.31%||26.70%|
|The cost of living is high in my area||18.71%||20.91%|
|I have too much debt||14.92%||17.63%|
|I forget to put money into savings||6.24%||7.81%|
|I don’t know how to budget||7.35%||10.08%|
|My savings account earns a low interest rate||9.58%||14.11%|
|Note: Respondents could select multiple answers.|
Living paycheck to paycheck is a symptom of a bigger problem, McClary said. “It often is the result of an individual who doesn’t have a spending plan and they’re not tracking what they spend, they’re not tracking their income. Because of that, things often fall off the rails.”
Simply taking the time to sit down and put together a budget can often help people break the cycle of living paycheck to paycheck, McClary said. Although the survey found that 9% of respondents said not knowing how to budget was keeping them from saving more, there might be a much higher percentage of people who aren’t using a budget to help them reduce spending and save more. The National Foundation for Credit Counseling’s 2019 Financial Literacy Survey found that less than half of Americans said they have a budget and keep close track of how much they spend.
Americans Need Higher Salaries to Save More
Considering that living paycheck to paycheck was named the top obstacle to saving, it’s not surprising that the top thing respondents said they needed to save more money was a higher salary. About 38% of respondents said that having a bigger paycheck would allow them to save more.
It is somewhat surprising, though, that younger adults weren’t most likely to say they needed a higher salary to save more. In fact, adults ages 35 to 44 and ages 55 to 64 were most likely — with 44% of both groups — to say that earning more would help them save more. An equal percentage of men and women — about 38% — said having a higher salary would allow them to save more.
Lowering debt was the second-most common thing respondents said they would need in order to save more — with about 18% choosing this option. Although respondents said a high cost of living was one of the top obstacles to saving more, only 9% said moving to an area with a lower cost of living was the No. 1 thing that would help them.
|What Is the No. 1 Thing That You Need in Order To Save More Money?|
|A better savings account with a higher interest rate||5.57%||8.56%|
|A higher salary||38.53%||38.04%|
|Someone to help me||3.12%||4.28%|
|To have access to a savings account||2.90%||4.53%|
|To learn better budgeting skills||9.35%||6.05%|
|To lower my debt||16.04%||19.65%|
|To move to an area with a lower cost of living||9.13%||8.56%|
Americans Prefer Savings Accounts, but Many Don’t Have Any Savings
The survey found that respondents who are saving are most likely to store their money in a savings account versus a money market account, CD account, non-interest or interest-bearing checking account, or physical piggy bank or safe. About 33% of respondents said most of their savings are in a savings account. However, an almost equal percentage of respondents — 29% — said they don’t have any savings.
A savings account can be a good place to store emergency funds because the money is easily accessible. But it’s not a place to put retirement savings because interest rates on savings accounts are relatively low. For long-term savings, accounts such as a 401(k) and IRA are better because of the tax benefits they offer. They also allow you to invest in stocks or stock mutual funds, which tend to offer a higher rate of return than traditional savings accounts.
How Americans Can Save More
Although the survey found that Americans believe they’re facing a variety of obstacles to saving, McClary said there are simple steps people can take to set aside more and improve their financial security.
Find motivation to save. Knowing that you need to save and being motivated to save are two different things. So if you need encouragement to save, consider the consequences of not saving, McClary said. “What would happen if you don’t fix the issue of an empty savings account?” he said. If you think about the problems and what will happen if you don’t do something now, that paints a pretty ugly scene. That can be motivating to do something quickly.”
Make saving a priority. You shouldn’t wait until the end of the month to see how much cash you have left over to put in savings. Instead, you should create a budget and include savings at the top of the list of essential expenses. To determine how much you can set aside, add up the expenses you must pay and determine what nonessential expenses you can cut to make more room in your budget to save. That doesn’t mean you have to cut out everything you enjoy, McClary said. Look for free and cheap alternatives. Also, look for ways to lower your monthly bills by comparing rates from other service providers or negotiating with your current providers.
Automate savings. To ensure that you save money, ask your human resources department at work to deposit part of each paycheck directly into a savings account. “That set-it-and-forget-it guarantees success for even the worst savers,” McClary said.
Find someone to hold you accountable. “Being held accountable to your goals is not something everyone can do for themselves,” McClary said. “The chances for success are improved when you bring positive support and encouragement from others around you.” Share your savings goals with a friend or family member, or enlist the help of a professional. The National Foundation for Credit Counseling has member agencies in all 50 states where you can sit down and work out a budget for free, McClary said. You can find a member agency in your area at NFCC.org.
Stop worrying about failing. A big reason people don’t bother to budget and set savings goals is because they’re afraid of failure, McClary said. But not trying guarantees failure. Instead of worrying about making mistakes, accept that it’s OK to stumble every now and then on your way to reaching your financial goals, he said. Just make a commitment to learning from those mistakes.
Methodology: GOBankingRates surveyed 846 Americans ages 18 and older between Nov. 25-26, 2019, asking six different questions: 1) How much money do you have in your savings account?; 2) What are you primarily saving for in 2020?; 3) What obstacle(s) are keeping you from saving more money? Select all that apply; 4) What is the No. 1 thing that you need in order to save more money?; 5) What is your annual income (before taxes are subtracted)?; and 6) Where do you store most of your savings? GOBankingRates used Survata’s survey platform to conduct the poll.
About the Author
Cameron Huddleston is an award-winning journalist with more than 18 years of experience writing about personal finance. Her work has appeared in Kiplinger’s Personal Finance, Business Insider, Chicago Tribune, Fortune, MSN, USA Today and many more print and online publications. She also is the author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances.U.S. News & World Report named her one of the top personal finance experts to follow on Twitter, and AOL Daily Finance named her one of the top 20 personal finance influencers to follow on Twitter. She has appeared on CNBC, CNN, MSNBC and “Fox & Friends” and has been a guest on ABC News Radio, Wall Street Journal Radio, NPR, WTOP in Washington, D.C., KGO in San Francisco and other personal finance radio shows nationwide. She also has been interviewed and quoted as an expert in The New York Times, Chicago Tribune, Forbes, MarketWatch and more.She has an MA in economic journalism from American University and BA in journalism and Russian studies from Washington & Lee University.
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