“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.”

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.

“Because the market gains disproportionately benefited high earners with the most wealth and highest equity allocations, the disparity in retirement readiness between low- and high-income earners has widened,” said Hahn.

In aggregate, about 70% of all baby boomers who have yet to retire are at risk of not being able to replace their preretirement 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 preretirement 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.

According to a preview of How America Saves 2024, our annual analysis of the savings behavior of 5 million Vanguard defined contribution plan participants, scheduled for release in late 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 savings 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.

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 preretirement 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 preretirement 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.

• How America Saves preview (6-page PDF, issued March 2024)
• The Vanguard Retirement Outlook: A national perspective on retirement readiness (31-page PDF, issued October 2023)
• The next frontier of retirement plan design: 4 big ideas (commentary, issued March 2024)