No One is Safe

Americans Use Retirement Savings to Cover Hardships Long Before Retirement

warning signs

Americans of all income levels who have 401(k)s are saving about a third of the amount needed to maintain their living standards in retirement. And they have been told that the shortfall is their fault. But NEFE-funded research from The New School finds that almost no one is safe from periods of lost income due to a health crisis, job loss or other life transitions in their working years; and lower-income Americans are especially vulnerable. Ninety-three percent of low-income men don’t even have a 401(k). And those who do often need that money long before retirement.

About the Research

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 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.

Researchers looked at data from the Survey of Income and Program Participation (SIPP) by the U.S. Census Bureau, which includes retirement savings, education, demographic characteristics, marital and parental history, health status and government assistance records. The SIPP data were linked with earnings records from the Social Security Administration and the Internal Revenue Service.

This summary presents key findings from Untangling the Determinants of Retirement Savings Balances by Teresa Ghilarducci, Ph.D., The New School for Social Research and the Schwartz Center for Economic Policy Analysis. Anthony Webb, Ph.D., Bridget Fisher, Siavesh Radppour and Joelle Saad-Lessler, Ph.D. also contributed to the report.

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
  • 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% 
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% report fair or poor health
  • 45% have a defined contribution retirement plan

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

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

Bottom 50%
Of those in the bottom 50 percent:

  • 22% report fair or poor health
  • 7% 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

What are Income Shocks?

Common factors that affect retirement savings accumulation include:

Personal Life

  • Changes in health status due to illness or injury
  • Marriage or divorce
  • Number of children
  • Receiving a lump sum payment such as an inheritance or spousal death benefits

Work Life

  • Educational attainment
  • Type of workplace (industry, size of employer)
  • Working full or part time
  • Union membership
  • Whether the person has a defined benefit or defined contribution retirement plan

“Positive” Income Shocks

Not all income shocks have negative effects. Drastic changes to earnings and retirement savings can come from windfall payments, such as receiving a lump sum payout from a previous job’s pension, an inheritance or spousal death benefits.

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, 1 in 4 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.

No one likes to believe that income shocks will happen to them; however 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.

“The story is more nuanced than simply ‘Americans are failing at retirement saving,’” says Ted Beck, NEFE president and CEO. “This research provides a more realistic, less judgmental way to talk about the context for why people are tapping their long-term savings long before retirement.”

Implications and Takeaways

An individual’s level of retirement savings depends strongly on their level of education and whether they participate in a retirement plan at work.

  • But only about 50 percent of American workers have access to an employer-sponsored retirement plan; and of those only about half participate.
  • Even those who do have retirement plans at work often take hardship withdrawals or stop contributing to their plans in times of crisis.
  • The 401(k) system was built to favor high- and mid-income earners with uninterrupted and growing earnings over time. While it may work in theory, the system does not account for the high likelihood of most workers needing a source of liquidity to cover financial emergencies.

Poor health and disability severely degrade retirement savings.

  • People in good health and with no disability in the bottom 90 percent of income distribution (the middle and bottom groups) have over $24,000 more saved for retirement.
  • People in good health and with no disability in the top 10 percent have about $86,000 more than those in poor health.

Episodes of lower earnings hurt older workers and low-and middle-income workers most.

  • Workers age 55 and up struggle to recover from episodes of losing 10 percent or more in earnings.
  • Periods of losing 10 percent or more in earnings did not affect high earners, but negatively affected low- and middle-income workers, highlighting the need for liquid savings for those in the middle and bottom groups.

Read more about the New School research at Untangling the Determinants of Retirement Savings Balances.

Back to Top

Join us for our 2nd Financial Education Innovation and Impact Summit in Denver, Oct. 8-10

More Info