“Nearly a portion of American families will run out of money in retirement if they avoid running at age 65, New predicts,” Marketwatch reports in a news story published through Morningstar. I’m going to give you all a moment to breathe into a paper bag.
Now that you’ve recovered, let’s take a closer look at the Morningstar Model of US Retirement Outcomes, created by Jack VanDerhei and Spencer Look. The details show a much more positive picture regarding Americans’ retirement income security.
Using knowledge about Americans’ income sources and retirement plan participation, Morningstar maps the Social Security benefits, pensions, and 401(k) balances American families will have at retirement age. Similarly, using insights into retiree families’ spending from the Health and Retirement Study (HRS), Morningstar forecasts how much Americans will need to spend in their old age. By combining realistic accumulation and spending styles, the Morningstar Retirement Style is indeed a leader among efforts to determine the long-term destiny of seniors.
The bad news is that Morningstar projects that 45% of Americans will likely not be able to cover their projected retirement expenses, prompting worrying headlines for some.
But there’s a key asterisk: Morningstar’s retirement spending goals are based on data on what current retirees actually spend. And what retirees spend is based on their total incomes – not just the Social Security, pensions and retirement accounts that Morningstar models, but welfare benefits such as Supplementary Security Income (SSI), earnings in retirement, and investments held outside of formal retirement plans. As a 2017 Census Bureau analysis shows, seniors receive only about three-quarters of their total incomes from Social Security, pensions and retirement accounts. The lowest-income retirees, who Morningstar finds are particularly underprepared, receive just 61% of their incomes from these three sources. So, while many seniors won’t be able to cover their spending using only income from Social Security, pensions and retirement account withdrawals, they might be able to do so using other income sources that Morningstar doesn’t count.
Fortunately, Morningstar lets readers adjust for this. For instance, if we assumed that seniors needed Social Security, pensions, and retirement accounts to cover 80% of their total spending, then the share of retirees falling shortfalls from 45% to 31%. If we lowered the threshold to 70%, which may better fit the lowest-income seniors, then the share falling short declines to 24%. That’s still not a great outcome, but reasonable assumptions alone reduce the share of seniors at risk of inadequate incomes by half.
But there’s a second aspect of the Morningstar retirement income model that also deserves attention: the fact that Morningstar projects that retirement income adequacy is improving over time, in contrast to many claims that retirement security is getting worse.
For example, Morningstar predicts that 52% of baby boomers would likely run out of money. But that figure drops to 47% for Gen X, 44% for Millennials, and 37% for Gen Z. If we assume that Social Security, pensions, and retirement accounts only want to cover 80% of retirement expenses, then the missing percentage drops from 31% for Baby Boomers to 26% for Gen Z.
This doesn’t surprise me, given the knowledge that retirement plan coverage, contributions, and balances appear to have increased, especially over the past two decades, while Americans work more and claim Social Security benefits later than before. the past.
None of this means there isn’t work to do. If Social Security were to become insolvent, resulting in a 20% or more relief in benefits, it would effectively constitute a retirement crisis for low- and even middle-income seniors. Additionally, as the Morningstar report details, making retirement accounts more available and automatically enrolling employees can help close retirement security gaps.
Modeling retirement income adequacy is an extremely complex task. I’m sure that Morningstar’s model, as good as it currently is, will evolve further in the future. But as of today, we can reasonably say that the retirement income challenge is smaller than many people claim and retirement income security is likely to improve over time.