Americans Face “Financial Vortex” in Navigating Path to Retirement

By Randy Myers

Even as employers have improved their defined contribution retirement savings plans, funding one’s own retirement remains, for many workers, a challenging task. It requires that they start saving early, continue saving at adequate levels throughout their careers, invest wisely, and then, once they stop working, find a way to convert their savings into a reliable stream of retirement income. Now, new research from Goldman Sachs Asset Management confirms just how hard that can be for many workers. In a survey of 967 workers and 599 retirees last year, the firm found that Americans face a vortex of financial challenges to building the retirement of their dreams. It also documented that substantial numbers of Americans believe the amount they’ve saved for retirement is well below where it should be.

By generation, baby boomers and Gen Xers are most likely to report that their retirement savings are behind schedule, said Chris Ceder, a senior retirement strategist with Goldman Sachs Asset Management, speaking at the 2023 SVIA Spring Seminar in Orlando, Florida. Approximately a quarter of both groups say their savings are very behind schedule, compared with only 14% of millennials and 11% of Gen Zers. In addition, 30% of boomers and 25% of Gen Xers say they are somewhat behind schedule.

Challenges to saving for retirement, Ceder said, include managing credit card debt, paying down loans (including student loans), saving for college, caring for and financially supporting family members, spending time outside the workforce to provide childcare or elder care, and simply managing the many monthly expenses households generate. All those demands can make it hard to have money left over for retirement saving. Today, inflation is adding to the pressure on Americans’ pocketbooks.

In looking at the impact of these challenges by generation, Ceder said the survey results generally show that saving for retirement becomes more difficult over time, with millennials and Gen Zers more likely to report their savings are ahead of schedule than boomers and Gen Xers.

“As you move through life more and more things come at you,” Ceder said. “Then you get into your 40s and 50s and find your spending is at its highest level at a time when it is important to make sure that your saving for retirement is still progressing.”

Saving for retirement becomes particularly challenging when people aren’t working, since the U.S. retirement system is, apart from the Social Security program, largely an employer-based system.

“If you are not working, you are falling behind,” Ceder said. “Things like childcare and other reasons that require you to step aside (from work) and deal with life events can be quite impactful.”

Goldman Sachs Asset Management sought to quantify how much the different challenges to saving could impact a person’s retirement savings. It found that not saving for retirement for five years because of student loans could reduce savings by 19%, having to act as a caregiver and not work for four years could reduce savings by 18%, and early retirement (at age 62) could reduce savings by 25%, all relative to someone who was able to save consistently for retirement. For workers wrestling with more than one of those challenges, the consequences can be even more severe.

“It’s not that hard to get to 37% or 40% below where you otherwise would have been able to save,” Ceder said.

In fact, such problems are common. Forty-six percent of the survey respondents said they had to pause their retirement savings at some point in their career to deal with a financial hardship. While most had that happen only once or twice in their careers, 15% of boomers and 14% of Gen X said it had happened to them five or more times. In addition, 56% of retirees said they retired earlier than planned—giving them less time to save and less time for their savings to grow—with 47% saying they did so for reasons outside their control.

Ceder said workers are starting to reframe how they think about retirement, often asking now not how much retirement savings they will have but how much retirement income they will need.

Surveyed retirees identified two top challenges around managing retirement income and investments, and for which they would like advice or guidance. They are generating retirement income and understanding how long their savings will last, with each cited by 37% of respondents.

Ceder noted that while annuities are becoming more popular in the retail market, only 8% of retirees said that selecting and purchasing annuities for retirement income was a challenge they wanted advice on. That figure was somewhat surprising given that the most commonly identified income feature important to them was consistent and stable income month over month.

The survey also indicated that workers think broadly about different ways to generate retirement income, which may be different than people in the retirement industry think about it.

“If you ask a retiree how they’re thinking about generating retirement income, the top answer is part-time work,” Ceder said, noting that 55% had selected that answer in the survey. Forty-seven percent selected “investment solutions,” 28% selected “rental income,” and 26% selected “annuity.”

“We often see these things as monolithic,” Ceder said. “Is (retirement income) an investment, is it an annuity, is it Social Security? But people accumulate different types of savings over time, and as they get close to retirement, the notion of part-time work becomes more important.”

For some people, Ceder said, continuing to work is an answer to not having enough savings. For others, it’s a chance to exit the day-to-day rat race and transition into work they find more enjoyable.

However they think about retirement and retirement income, Ceder said, nearly all the survey respondents (95%) said they consider it at least somewhat important to receive financial help—education, advice or counseling—to successfully prepare for their post-work years. While they view their employer’s retirement plan as a top source of information while working, they are much less likely to do so once they’re retired. The challenge for plan sponsors, Ceder said, is to think about how they can change their defined contribution retirement plans so that employees consider it worthwhile to stay in their plan even after they retire and continue to rely on it for help.

As part of its research, Goldman Sachs Asset Management also looked at how women are faring in preparing for retirement relative to men and found them trailing in a number of key areas. For example, 58% of retired women reported their current income is less than half their pre-retirement income, versus 44% of retired men. In addition, half of working women said they are behind schedule with their retirement saving, versus about 35% of men.

Ceder said it will be important for the retirement industry to think about how it can better help the next wave of retirees navigate a path to a successful retirement as they deal with the challenges confronting them.