Untangling Determinants of Retirement Savings Balances

Americans have been made to feel like failures when it comes to retirement savings. They have been told that their savings shortfalls are their fault. If only they would save more, make better financial decisions, and anticipate future life events, they would be able to approach their golden years without worry. But few actually make it to age 65 with adequate — let alone healthy — nest eggs.

This new NEFE-funded research shows that it is typical for a person to experience significant setbacks in their retirement savings throughout their lifetime — so common, that 96 percent of Americans experience four or more income shocks by the time they reach age 70.

Job loss, sickness, divorce: these are the kinds of life and economic events that derail even the most disciplined of savers. People want to believe “it won’t happen to me.” The truth is that almost no one is safe from these shocks, and low-income individuals are disproportionately affected. With limited means to finance these shocks, they withdraw from their 401(k)s — if they are fortunate enough to have access to employer-provided retirement plans at all.

Most retirement savings research isolates just one determinant — such as a change in health status — and measures the impact of that change on retirement savings, holding all other factors constant. This approach assumes that changes happen one at a time, and ignores the fact that life events that affect retirement savings — unemployment, divorce, income disruptions — cluster together.

However, this study takes into account the reality that while sometimes unpredictable, changes in peoples’ lives do not occur independently, and that the magnitude of the impact on retirement savings depends on gender, race and socioeconomic status. By evaluating each factor’s relative impact on defined contribution retirement savings accumulations for different age and income groups, it becomes more clear who is at risk of not having enough retirement savings, and why.

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