Certain life events during a participant’s accumulation phase can throw a wrench into even the most well-thought-out strategy. Our latest research offers insights into how these disruptions affect the retirement outcomes of target-date participants—and what steps they can take to get back on track.
The timing and duration of the events can make a big difference. Earlier disruptions tend to have a larger impact on wealth accumulation but allow more time to recover. Later disruptions can require more aggressive adjustments because of the shorter time horizon. The good news is there’s flexibility in how participants can choose to respond to temporary saving setbacks. Whether they increase their saving rate or reduce their retirement spending goal, either strategy can be effective in restoring retirement readiness.
One of the key findings is the significant impact of a delayed start in saving. For example, participants who start saving just five years later than planned see the probability of meeting spending needs at age 95 drop from 92% to 79%, with a median wealth reduction of about $320,000 by age 65. However, increasing their annual saving rate by just 2 percentage points, or reducing their retirement spending goal by 8 percentage points, can largely offset these negative effects.
Our research also explores the effects of temporary employment disruptions, such as one-year breaks. These shorter interruptions have a relatively limited impact, with spending sufficiency probabilities at age 95 remaining high at 87% to 89%. For more extended breaks, such as a three-year leave for parental or caregiving responsibilities, the impact is more pronounced. Such a break around age 30 can lead to a $250,000 shortfall in retirement wealth and a 9-percentage-point drop in spending sufficiency. Increasing savings by 2 percentage points or reducing spending goals by 6 percentage points can help mitigate these effects.
While life events can challenge retirement savings, they don’t have to derail them. By making strategic adjustments, such as increasing savings or reducing spending, participants have options for getting back on track. Importantly, target-date funds remain a resilient foundation for retirement investing, offering a professionally managed glide path that helps participants navigate life’s uncertainties.
Notes
- All investing is subject to risk, including the possible loss of the money you invest.
- Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target-date funds is not guaranteed at any time, including on or after the target date.