4 reasons retirement readiness is declining

March 23, 2023 10:29 AM

Americans are increasingly falling behind on their retirement savings, a Fidelity study found.

With each passing year, Americans are getting less ready for the future.

That's the unsettling conclusion of a new study by Fidelity Investments, which found that U.S. adults are less prepared for retirement now than they were three years ago. According to the asset management, brokerage and custodial giant, the average American is on track to have only 78% of the income they'll need in their post-work years — down from 83% in January 2020.

Given the tumult of the past three years — including the COVID-19 pandemic, a bear market and record inflation — some experts say the savings gap is understandable.

"American savers continue to navigate through turmoil and uncertainty today," Rita Assaf, Fidelity's vice president of retirement, said in an email interview. "The decline in preparedness is being driven by two primary factors: People are saving less and investing more conservatively, which are natural reactions during a challenging financial environment."

After surveying 3,569 Americans in the summer of 2022, Fidelity found that more than half — 52% — will need to make "modest to significant adjustments" to their retirement lifestyle if they don't start saving more. In particular, baby boomers (born 1946-1964) and millennials (born 1981-1996) are saving at lower rates than they did in 2020 — boomers were down 2.2%, while their children's generation was down 0.2%.

And this report is far from an outlier. A study by the personal finance website Bankrate found that, in late 2022, at least 55% of Americans were falling short on their retirement savings, with 35% "significantly behind where they needed to be." And, according to study by the Fed, 26% of U.S. workers in 2021 had no retirement savings at all.

Why are so many Americans falling behind? More than anything else, Fidelity blames the bumpy economy, which for the past 15 months has been marked by historic inflation and a volatile stock market. In that context, some financial advisers were not shocked by the study's findings.

"It is not surprising that Americans are behind on their retirement savings," said Jay Zigmont, a certified financial planner and the founder of Childfree Wealth in Water Valley, Mississippi. "With somewhere around half of the U.S. living paycheck to paycheck, saving for retirement is a luxury for many."

But other factors played a role as well. Here are some of the biggest reasons retirement readiness is in decline:

Rising prices

The top concern cited by Fidelity's respondents was inflation. Last June, the consumer price index rose year-on-year by 9.1%, a rate not seen since the early 1980s. Since then, that pace has come down — in February it was at 6% — but prices remain stubbornly high.

As a result, Americans are finding it harder to save. Thirty-one percent of Fidelity's respondents — including 36% of millennials — reported saving less for retirement because of rising prices. In general, 82% worried that inflation would eat into their finances.

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"When inflation hit, those who were living paycheck to paycheck had no room in their budget and had to either start using debt or cut back on savings," Zigmont said. "When your choices are paying for housing, healthcare and life now versus saving for retirement, the choice seems clear."

Stock volatility

Meanwhile, retirement portfolios have been pummeled by a brutal stock market. At the end of 2022, the S&P 500 was down 19.4% — its worst yearly performance since 2008. Some wealth managers said the bear market caught their clients off guard.

"Too often people chase returns, while what grew last year could fall this year, and vice versa," said Nicholas Bunio, a certified financial planner at Retirement Wealth Advisors in Downingtown, Pennsylvania. "Buying Tesla at the top only led to a massive crash last year, but the average person only saw dollar signs when the stock was up."

Healthcare costs

Another major factor was people's medical bills. In the United States, the average person spends $5,000 more on healthcare than in any other high-income country, according to the Kaiser Family Foundation. These costs can often get in the way of retirement savings.

Among Fidelity's respondents, 67% said rising medical expenses influenced their decisions on when, where and how to retire. And among those who retired and then returned to work (5% of all those surveyed), 55% said it was because they lacked savings and needed healthcare.

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For many Americans, these expenses force a choice between the present and the future.

"I recently had a client ask if they should cut back or stop contributing to their 401(k) to help pay for an upcoming medical procedure," Zigmont said. "Fortunately for him, he had other areas he could adjust, but I am not surprised that someone would have to choose between saving for retirement and healthcare."

Unrealistic expectations

There's also another, more psychological obstacle to retirement readiness. For many Americans, Fidelity found, there's a disconnect between the lifestyle they expect in retirement and the one they've actually prepared for.

When asked in a general way about their expectations, Americans were highly confident. Almost three quarters — 74% — predicted a comfortable life in their golden years, including 19% who expected it to be "very" comfortable. Then, when Fidelity asked more specifically about their future expenses, this confidence sank. Suddenly, only 54% believed they were saving enough, and 35% admitted to being off-track.

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Some wealth managers have grown familiar with this mismatch. Bunio said one of the biggest stumbling blocks for his clients has been an "unrealistic idea of retirement income."

"I had one client try to withdraw 25% in one year for 'fun,'" he said. "I said, 'Okay … but a 25% withdrawal in a good year would still lead you to run out of money in about five years.' He was shocked and felt his investments should 'do better.'"

Fidelity offered a simple explanation for this: "One possible reason for the disconnect," the study said, is that "people may be underestimating their needs."

As Bunio's example illustrates, that's one problem that can be cleared up by a helpful financial adviser.