A recent study from Vanguard found that millennials are closer to reaching their retirement goal than baby boomers. Millennials aged 37 to 41 are projected to replace 58% of their pre-retirement earnings. In contrast, late boomers, classified as those aged 61 to 65, are expected to replace only 50% of their earnings, highlighting a significant difference in retirement readiness between the two generations.
Even though it might sound good at first, both of these numbers aren’t quite where they should be. Vanguard figured out that both millennials and late boomers should aim to replace 83% of the money they earned before retirement to cover their expenses. However, neither group is there yet, millennials are doing better than boomers in getting closer to that target.
The global retirement landscape is changing. As populations age, government retirement benefits are under pressure. At the same time, the shift from defined benefit to defined contribution workplace retirement plans means that workers bear more responsibility for managing capital markets risk and turning accumulated savings into retirement income. And many workers have no access to a workplace plan.
The Vanguard Retirement Outlook surveyed this changing landscape and assessed its implications for workers. They grounded their analysis in the Vanguard Retirement Readiness Model, which uses Vanguard’s capital markets forecasts and empirical data on household balance sheets, savings rates, and spending patterns to estimate retirement readiness for different demographic groups.
In tandem with the report, Vanguard introduced a new proprietary forecasting tool, the Vanguard Retirement Readiness Model (VRMM). The model incorporated inputs from Vanguard’s capital markets model (VCMM)—a sophisticated simulation engine—in combination with empirical data on household balance sheets, savings rates, and spending patterns to estimate retirement readiness for different age and income groups.
Vanguard also assessed American workers’ prospects for being retirement-ready with a novel metric, the sustainable replacement rate—the percentage of pre-retirement income that a worker can replace throughout retirement in 90% of market and mortality scenarios.
The model compares the sustainable replacement rate to retirement spending needs inferred from the Health and Retirement Survey (HRS) data. The difference between these two figures represents the projected savings gap, which the model uses to assess retirement readiness.
Using this new model, Vanguard forecasted readiness for three generations: early millennials (ages 37-41); mid-Generation X (ages 49-53); and late baby boomers (ages 61-65). For each, generational readiness is estimated at four points from the national income distribution—the 25th, 50th, 70th, and 95th percentiles—offering an assessment of 12 different income and generational cohorts.
A range of projections emerge across cohorts. For instance, among late baby boomers, high-income workers are on track to meet their retirement spending needs, while low- and middle-income workers are off track. Vanguard researchers estimate that late boomers at the bottom quartile of the income distribution will be able to sustain retirement spending equal to 64% of pre-retirement income.
However, HRS data suggest that current retirees from this working cohort have spending needs of 96% of pre-retirement income. In contrast, higher-income workers—those in the 95th percentile of the income distribution—are on track to readily finance life after retirement.
Examining the systemic and individual factors influencing retirement readiness through this lens prompts essential inquiries and provides practical insights for policymakers, employers, and individuals alike.
Addressing these findings can lead to informed strategies and collaborative efforts that contribute to enhancing overall retirement preparedness, fostering a more secure future for everyone involved.
As we navigate the complexities of retirement planning, a concerted effort is needed to implement measures that support both systemic improvements and individual initiatives, ensuring a more resilient and stable retirement landscape for generations to come.
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