VALLEY FORGE, PA (October 3, 2023)—The retirement readiness outlook is mixed for Americans, according to the inaugural Vanguard Retirement Outlook report. This comprehensive analysis—which builds off expertise garnered from Vanguard’s nearly fifty years serving individual investors—evaluates retirement readiness for a nationally representative sample of American workers.

“A secure retirement is part of the American dream,” said Joe Davis, chief global economist, and head of Investment Strategy Group at Vanguard. “We recognize the significant challenges and opportunities for policymakers, employers, and individual investors to help Americans make this dream a reality. This report aims to heighten industry and national attention around finding more solutions to foster retirement readiness for all Americans.”

In conjunction with the report, Vanguard has introduced a new proprietary forecasting tool, the Vanguard Retirement Readiness Model (VRMM). The model incorporates inputs from Vanguard’s capital markets model (VCMM)—a sophisticated simulation engine—in combination with empirical data on household balance sheets, savings rates, and spending patterns to estimate retirement readiness for different age and income groups.

Vanguard also assessed American workers’ prospects for being retirement-ready with a novel metric, the sustainable replacement rate—the percentage of pre-retirement income that a worker can replace throughout retirement in 90% of market and mortality scenarios. The model compares the sustainable replacement rate to retirement spending needs inferred from the Health and Retirement Survey (HRS) data. The difference between these two figures represents the projected savings gap, which the model uses to assess retirement readiness.

Using this new model, Vanguard forecasted readiness for three generations: early millennials (ages 37-41); mid-Generation X (ages 49-53); and late baby boomers (ages 61-65). For each, generational readiness is estimated at four points from the national income distribution—the 25th, 50th, 70th, and 95th percentiles—offering an assessment of 12 different income and generational cohorts.

A range of projections emerge across cohorts. For instance, among late baby boomers, high-income workers are on track to meet their retirement spending needs, while low- and middle-income workers are off track. Vanguard researchers estimate that late boomers at the bottom quartile of the income distribution will be able to sustain retirement spending equal to 64% of pre-retirement income. However, HRS data suggest that current retirees from this working cohort have spending needs of 96% of pre-retirement income. In contrast, higher-income workers—those in the 95th percentile of the income distribution—are on track to readily finance life after retirement.

“Notably, although many portray younger generations as facing more hurdles for retirement savings, this Vanguard research demonstrates that millennial and Gen X savers have benefitted significantly from improved defined contribution plan design that encourages saving and investing in age-appropriate asset allocations,” said Fiona Greig, global head of investor research and policy at Vanguard.

With younger generations, Vanguard estimates that millennials at the 50^th income percentile will be able to generate sustainable retirement income equal to 58% of their pre-retirement earnings, eight percentage-points more than the 50% of pre-retirement earnings estimated for median-income late boomers. The generational gains in retirement readiness are even larger for higher-income workers. Early millennials at the 70^th percentile of the income distribution are on track to reach a sustainable replacement rate of 66%, 15 percentage-points higher than late baby boomers, and a level that will enable them to just about meet their projected spending needs in retirement (68%), per HRS data.

In contrast, the retirement outlook is particularly challenging for lower-income workers across all generations. Across all three generations, workers at the 25^th income percentile face a projected retirement savings gap of 32%, whereas high-income families are projected to have a savings surplus of 20% based on expected spending needs. The outlook is similar across generations at the 50^th percentile, with their sustainable replacement rate falling 33% shy of projected spending needs.

While the inaugural Vanguard Retirement Outlook highlights that retirement security is certainly in reach for some Americans, it underscores that more progress can and should be made. The report reveals that policymakers have an opportunity to connect low-income workers with the capital markets to reduce their projected retirement readiness gap. Further, employers can help workers save adequately by adopting best practices in retirement plan design, as highlighted in Vanguard’s How America Saves research: automatic enrollment, annual automatic escalation of savings rates, and default investment into a diversified equity and fixed income portfolio appropriate for retirement goals. Finally, individuals themselves can take steps to improve retirement readiness by saving more, delaying retirement, or tapping into their home equity once they retire.

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About Vanguard

Founded in 1975, Vanguard is one of the world's leading investment management companies. The firm offers investments, advice, and retirement services to individual investors, institutions, and financial professionals. Vanguard operates under a unique, investor-owned structure where Vanguard fund shareholders own the funds, which in turn own Vanguard. As such, Vanguard adheres to a simple purpose: To take a stand for all investors, to treat them fairly, and to give them the best chance for investment success. For more information, visit vanguard.com.

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