Those are the findings of a recent study from Vanguard , the world ’ s largest mutual fund company . The “ Vanguard Retirement Outlook ” used data from the Social Security Administration and other federal departments to study the financial resources households were projected to have in retirement and compared them with what these households ’ rough financial needs would be . Vanguard broke the data into four cohorts ( low- and middle-income , affluent and high-income people ) and three distinct generations ( late baby boomers , Gen Xers and early millennials ).

The results show the possible retirement crisis facing all but the highest earners .

Funding Needs Income replacement is calculated by what you made in your working years — the more you make , the smaller a percentage of your annual income you actually need to replace to fund retirement .

The four income groups included a low-income 25th percentile group with $ 22,000 in median annual income . The middle 50th percentile brought home $ 42,000 , the affluent 70th percentile took home $ 61,000 , and the wealthiest 95th percentile took home $ 173,000 .

While a 25th percentile earner needs to replace 96 % of their income in retirement to cover spending needs , an affluent 70th percentile earner needs to replace only 68 %, while the highest earners must replace only 43 %.

The report notes that these needs exceed

For all but the wealthiest late boomers currently entering their target retirement years ( those ages 61 to 65 ), the picture isn ’ t encouraging . the 70 % to 85 % targets widely used in financial services for lower-income families . “ Conversely ,” Vanguard says , “ for high-income families , estimated spending needs imply a more modest retirement savings target than the industry benchmark .”

Social Security funds a smaller portion of retirement income for higher earners — only 18 % of a wealthy 95th percentile earner ’ s needs , while it funds 46 % of the needs for a 50th percentile earner and 62 % of the needs for someone in the 25th percentile .

The implication , Vanguard says , is that lower-earning families must self-finance a larger portion of their retirement spending . With Social Security help , a 70th percentile earner must save enough to replace 28 % of their pre-retirement income each year throughout retirement , but a 50th percentile earner must save to replace 37 % of their income , while a 25th percentile earner must save to replace 34 % of their income .

Late Boomers In Peril

For all but the wealthiest late boomers currently entering their target retirement years ( those ages 61 to 65 ), the picture isn ’ t encouraging . The low-income cohort of late baby boomers are on average able to sustainably replace 64 % of their pre-retirement income using savings and Social Security , but since they spend 96 % of their pre-retirement income , that leaves a 32 percentage point gap between their spending needs and the sustainable replacement rate . For 50th percentile earners , the gap is even larger at 33 percentage points , while affluent 70th percentile earners experience on average a 17 percentage point gap .

The gap exists among these cohorts because of their inability to replace employment income with income derived from retirement savings , the report says . Among the 70th percentile cohort of late baby boomers , just 10 % of their pre-retirement income could be sustainably generated from their private savings each year . Among the 25th percentile low earners , it ’ s just 2 %.

12 | FINANCIAL ADVISOR MAGAZINE | NOVEMBER 2023 WWW . FA-MAG . COM