For many baby boomers, recent market gains have helped narrow the retirement savings gap. However, a gap still exists, and tapping home equity can be a way to shrink the gap even further.
“Improvement in retirement readiness is encouraging, but it is not enough,” said Kelly Hahn, Vanguard Investment Strategy Group’s head of retirement research. “Baby boomers will need to make careful financial planning decisions in addition to some adjustments in lifestyle.”
Retirement readiness improves, but the savings gap still remains for many baby boomers
The retirement outlook has improved for many baby boomers, largely driven by higher wealth for all but the bottom quartile of wage earners, according to the latest Survey of Consumer Finances. The strong market gains from 2019 to 2022, which included an 18% increase in the equity market, were a large contributor to the overall higher wealth.1
“As a result, we see a meaningful improvement in retirement readiness for many baby boomers, but a savings gap still remains for all but the earners at the top 5th percentile,” Hahn said.
The retirement savings gap for median income earners narrowed by eight percentage points, from a 33% average savings shortfall per year to 25%. But the difference between low- and high-income workers grew.
Notes: From the 2023 Vanguard Retirement Outlook to the 2024 Vanguard Retirement Outlook, there are differences that need to be accounted for in comparing the savings gap or surplus. Per capita income distribution has changed: 25th-percentile income was $25,000 in 2023 and $31,000 in 2024; 50th-percentile income was $47,000 in 2023 and $49,000 in 2024; 70th-percentile income was $69,000 in 2023 and $77,000 in 2024; and 95th-percentile income was $198,000 in 2023 and $196,000 in 2024. Spending needs have also changed: 25th-percentile spending needs were 96% of pre-retirement income in 2023 and 87% in 2024; 50th-percentile spending needs were 83% of pre-retirement income in 2023 and 76% in 2024; 70th-percentile spending needs were 68% of pre-retirement income in 2023 and 65% in 2024; and 95th-percentile spending needs were 43% of pre-retirement income in 2023 and 52% in 2024. All dollars are in 2022 dollars. Accessing home equity refers to selling homes and investing the proceeds in a portfolio of stocks and bonds. This approach models maximum home equity extraction and implies that workers become lifelong renters. Few retirees currently execute this strategy, but we wanted to determine the maximum impact given large shortfalls among many baby boomers.
Sources: Vanguard calculations, based on data from the Federal Reserve Board’s Survey of Consumer Finances (2019 and 2022), the University of Michigan Health and Retirement Survey (2014), and the Social Security Administration (2022).
The retirement outlook for baby boomers is mixed
In aggregate, about 70% of all baby boomers who have yet to retire are at risk of not being able to replace their pre-retirement lifestyle.
“The likelihood of falling short is concentrated among those in the lower end of the income distribution. Despite the progressivity of Social Security, it is not enough to fund a comparable lifestyle in retirement,” Hahn said. “In contrast, those high earners in the top 5th percentile have a significant savings surplus equal to 29% of their pre-retirement income. This is due to high earners requiring much less to maintain a comparable lifestyle in retirement and having saved the most for their retirement.”
Fu Tan, a Vanguard Investment Strategist, noted that one way to close the savings gap further is by accessing home equity. “Home values appreciated 20% in real terms from 2019 to 2022, and they have continued to increase in 2024,” Tan said.2 “For the median worker, accessing home equity could close the savings gap by 13 percentage points.” Even with this improvement, however, there is still a shortfall of about 12% per year on average for the median worker, which will necessitate some adjustment in lifestyle and even more careful financial planning.
Notes: The average sustainable replacement rate is the highest level of consumption as a share of pre-retirement income that can be sustained in 90% of market return/mortality scenarios. Average spending needs measures the average of the declining empirical consumption in retirement as a percentage of pre-retirement income using Health and Retirement Study and Consumption and Activities Mail Survey data.
Sources: Vanguard calculations, based on data from the Federal Reserve Board’s Survey of Consumer Finances (2022), the University of Michigan Health and Retirement Survey (2014), and the Social Security Administration (2022).
The future for younger investors looks more promising
According to a preview of How America Saves 2024, our annual analysis of the saving behavior of 5 million Vanguard defined contribution plan participants, released in June, 43% of participants increased the deferral rate in their retirement plan in 2023. This represents an all-time high since we started tracking this metric in 2019.
“We are seeing saving rates go up as workers in well-designed plans seize opportunities, and more of these plans are autoenrolling at a higher default rate,” Hahn said. “This is particularly helpful for younger investors, who have longer investment time horizons to take advantage of these opportunities.” Hahn added that the adoption of the SECURE 2.0 Act, which became law in late 2022, should only increase the adoption of autoenrollment, ensuring that more workers will save for retirement.
Fiona Greig, Vanguard’s global head of investor research and policy, said that one way employers can help workers is by adopting best practices in plan design.
“Broadening access to defined contribution plans for more workers and including features such as autoenrollment, immediate eligibility and vesting, and higher default contribution rates can really make a difference in helping Americans prepare for a financially secure retirement,” Greig said.
Special thanks to Nicky Zhang, Vanguard investment strategist, for his contributions to this article.
About the Vanguard Retirement Outlook
Vanguard’s Retirement Outlook measures the sustainable replacement ratio and spending needs for retirees. Using the Federal Reserve Board’s Survey of Consumer Finances, the average sustainable replacement rate is the level of consumption as a share of pre-retirement income that can be sustained in 90% of market return/mortality scenarios. Average spending needs measures the average of the declining empirical consumption in retirement as a percentage of pre-retirement income using Health and Retirement Study and Consumption and Activities Mail Survey data.
In this current Outlook, we’ve made several methodological improvements. The two most impactful changes are the definition of wealth and the assessment of spending needs in retirement. We now define wealth to exclude transaction accounts from checking and savings accounts, assuming that these accounts are used to fund current spending needs. In assessing spending needs in retirement, we now incorporate declining spending behaviors. We observe from the Health and Retirement Survey that spending declines by about 1% per year in retirement. By incorporating the decline in spending, we now calculate the average spending needs over an individual’s retirement years.
1 Data are based on Standard & Poor’s 500 Index performance for December 31, 2019, through December 31, 2022.
2 Data are based on the S&P CoreLogic Case-Shiller U.S. National Home Price Index, adjusted for inflation, for December 2019 through December 2022.
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