Common Income Shocks Disrupt Retirement Savings


Research Shows Americans Use Savings to Cover Hardships Long Before Retirement

DENVER—Americans of all income levels with a 401(k) are only saving about a third of the amount needed to maintain their living standards in retirement. And they’re frequently being told that the shortfall is their fault. But new research from The New School, commissioned by the National Endowment for Financial Education® (NEFE®), finds that almost no one is safe from periods of lost income due to a health crisis, job loss or other life transitions during their working years. In fact these income disruptions, defined as an annual earnings drop of more than 10 percent, are so common that 96 percent of Americans experience four or more of these income shocks by the time they reach age 70.

“The story is more nuanced than simply saying Americans are failing at retirement savings,” says Ted Beck, president and CEO of NEFE. “No one likes to believe that income shocks will happen to them. Yet this research shows that it is not a matter of if something will disrupt earnings, but when and how severe the effects of such shocks will be.”

Most retirement savings research looks for a single factor—such as medical expenses—to explain why individuals aren’t saving enough for retirement. But this study by The New School, led by Teresa Ghilarducci, Ph.D., and Anthony Webb, Ph.D., takes into account the reality that income shocks such as unemployment, divorce and other earnings changes often cluster together; and the impacts from these shocks vary in magnitude depending on the person’s race and socioeconomic status.


In addition to race, citizenship and other demographic characteristics, the study looked at American male workers in four age groups: ages 25-34, ages 35-54, ages 55-61, and ages 62-70. By age 55-61, older men have $11,000 to $47,334 more in retirement savings (depending on income level) than their younger counterparts. Older men are more likely to:

  • Be white
  • Be widowed, divorced or separated
  • Have more children
  • Have defined benefit retirement plans
  • Be in poor health and/or be disabled
  • Have health insurance


The effect of being nonwhite is largely negative. Compared to their white peers, nonwhite workers had significantly lower retirement savings:

  • African-Americans (-$16,977)
  • Asians (-$11,743 to -$41,979)
  • Hispanic nonwhites (-$8,280 to -$24,278)

The racial impact is more negative and significant among the top 10 percent of earners (-$19,000 to -$54,000) than among the bottom 50 percent (-$8,000 to -$16,000).


Because the impact of life events depend heavily on the cushion one has in wealth and income, the sample also was divided into three income groups.

Top 10 Percent

Workers in the top 10 percent of national income distribution have more than three times the assets of workers in the middle group. Those in the top 10 percent are:

  • More likely to be white and educated
  • More likely to work full time for a large company
  • Only 2 percent report fair or poor health
  • 45 percent have a defined contribution retirement plan

Middle 40 Percent

Workers in the middle have three times the assets of the bottom group. Of those in the middle 40 percent:

  • 8 percent report having fair or poor health
  • 36 percent have a defined contribution retirement plan

Bottom 50 Percent

Of those in the bottom 50 percent:

  • 22 percent report fair or poor health
  • 7 percent have a defined contribution retirement plan

The middle and bottom groups are more likely to:

  • Be disabled
  • Be divorced, widowed or separated
  • Have fewer children
  • Receive government assistance

How Common Are Income Shocks?

  • By age 70, 96 percent of American men have had their annual earnings drop more than 10 percent at least four times in their working life.
  • Among American male workers, 61 percent of those ages 25-70 report at least one episode when they lost work earnings for an entire year.
  • And by age 70, one in four male workers reports having four or more episodes of no work earnings for at least a year.

The Effects of Income Shocks

Unsurprisingly, those in the middle- and lower-income groups are more likely to experience economic shocks from job loss or poor health and they are more negatively affected by earnings losses. For those lucky enough to have a retirement plan at all (only 7 percent of the bottom income group have defined contribution plans), these funds often are the only resource to turn to in times of financial need.

By far the most negative impacts come from declines in health, including long-term illness and work-limiting disability. When a low- or middle-income worker cannot work, or when their income decreases significantly for any reason, often they withdraw money from retirement savings accounts—and pay large penalties—or they stop contributing to their retirement savings altogether. Even decreasing the amount of their contributions can have lasting detrimental effects on savings momentum over time.

Read the complete New School report “Untangling the Determinants of Retirement Savings Balances.

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