Retirement Savings Are Growing But Not For Everyone

There is a seemingly endless debate about whether Americans have sufficient savings for retirement (for example, see these pieces from the American Enterprise Institute and the National Institute on Retirement Security). The answer is that many people do. But tens of millions do not.

Overall retirement assets have grown enormously in recent years— to $36 trillion according to Investment Company Institute data, despite a terrible stock market in 2022. But looking at total retirement plan savings, or even average 401(k) and IRA savings, misses a much more nuanced story: Much of the increase in these account balances is skewed to higher-income workers. As a result, while many near-retirees seem better prepared for the average costs of old age, including for healthcare and long-term care, tens of millions of others are not.

Big Gains For Some People But Not All

A new report by Anqi Chen and Alicia Munnell of the Center for Retirement Research at Boston College finds that for individuals close to retirement—those from ages 55 to 64—median combined 401(k) and IRA account balances rose from $120,000 in 2019 to $150,000 in 2022. Their total median household retirement savings rose from $135,000 to $204,000.

To put it another way, in 2022, half of workers ages 55 to 64 had retirement savings of $150,000 or more, while half had $150,000 or less. Savings in these defined contribution plans are critical because they represent the largest single source of financial wealth for many households, the Census Bureau notes. And traditional defined benefit corporate pension plans have largely faded from the scene.

The boost in overall retirement savings is good news. And it probably got even better in 2023, when the stock market more than recovered its 2022 losses. But, there is a big but.

For the lowest-income households, median retirement balances fell over the period, from $32,200 to just $25,000. And while median balances rose for the second lowest income group, the share of those workers with 401(k) plans fell sharply, from 48% to 38%.

Good News For Those With Middle Incomes

The news in the CRR report was far better for higher-income households. For example, median retirement savings for middle-income households more than doubled from $97,000 in 2019 to $220,000 in 2022, while the share of workers in that age group increased their participation in 401(k)-like employer-based direct contribution plans from 53% to 61%.

At the very top of the income distribution, the highest-earning 20% of near-retirees saw their median balances rise from about $800,000 to more than $1 million, while their participation in 401(k)s held steady at about 75%.

Overall, the share of all workers participating in 401(k)-type plans essentially has been flat for the past two decades. In 2004, 79% of eligible workers participated in these retirement plans. In 2022, that share had grown only modestly, to 83%.

And, perhaps more troubling, only about half of workers ages 55 to 64 were enrolled in such plans, leaving them with few assets (except perhaps their home, for those who own one) to pay for their costs in old age.

For many, that will leave Social Security as their primary source of income in old age. But the average monthly Social Security benefit this year is about $1,788, or a bit more than $21,000 annually.

Rising Costs

At the same time, expected costs for older adults are rising. For example, in 2021, that average monthly Social Security check would have paid for less than six days in a nursing home. And costs have increased significantly since then, due to sharply higher labor costs.

The investment firm Fidelity estimates that individuals turning 65 this year will need to have saved $157,000 to pay for their out-of-pocket medical needs in old age, even though nearly all of them are covered by Medicare. Those costs include premiums, copays, deductibles, and other expenses.

Thanks to changes in the Medicare law, that requirement did not increase from 2022 to 2023. But that was the first time in a decade that out-of-pocket costs were stable.

And it means that half of near-retirees will not have saved enough to pay for their medical care in old age, to say nothing of other expenses.

At the same time, in 2022, the average lifetime out-of-pocket cost of long-term care for all 65-year-olds was about $45,000, according to my Urban Institute colleague Rich Johnson and Judith Dey of the U.S. Department of Health and Human Services. But about 1 in 7 older adults will spend $100,000 or more and roughly 1 in every 12 will spend $200,000 or more. And who knows at age 65 how much care they will need at age 80?

Of course, retirees also need to save for other expenses in old age, including rent or a mortgage, utilities, transportation, taxes and the like.

The very lowest income retirees may rely on Medicaid to provide a safety net in old age. But this latest CRR report suggests that many lower-middle income people — such as those who worked all their lives at blue-collar, low-wage jobs — will not have the resources they need to manage their old age. And that would be a tragedy.