3 Reasons You Might Need to Boost Your Retirement Savings

Are you saving enough for retirement?

On the positive side, a generally bullish market has made things easier for retirement savers. Over the trailing 15-year period through December 2024, a simple balanced portfolio combining 60% stocks and 40% bonds generated annualized returns of about 9.4%―above the 8.7% long-term historical average since 1926. There have been some downturns along the way (such as 2008, 2018, early 2020, and 2022), but market dips have been relatively short-lived.

In addition, there’s some evidence that younger retirement plan participants are taking the right steps to build up their nest eggs. Starting with the Pension Protection Act of 2006, retirement plan sponsors have been allowed to implement both automatic enrollment and automatic increases in participants’ savings rates―under Secure 2.0 Act, new 401(k) and 403(b) plans are now required to automatically enroll employees and offer an auto-escalation feature―as well as opting employees into a target-date fund as a default investment option. These features have helped younger investors make better progress toward retirement. Indeed, about 77% of Generation Z (the cohort of people born between 1997 and 2012) savers surveyed believe they’re on track to retire with the lifestyle they want based on BlackRock’s 2024 Read on Retirement survey, compared with 72% for millennials, 60% for Generation X, and 68% for baby boomers.

These trends both bode well for retirement nest eggs. But many people might still need to boost their retirement savings, for the three reasons below.

1: Future Investment Returns Might Be Lower Than in the Past

In our recently published annual report on the state of retirement income, we use forward-looking estimates for asset-class returns to estimate how much retirees can safely withdraw from their portfolios (assuming a 90% probability of having funds remaining at the end of a 30-year retirement period). Because equity valuations are currently relatively high and fixed-income yields are relatively low, we used lower return assumptions for stocks, bonds, and cash over the next 30 years. As a result, we estimate that the 4% standard rule of thumb for retirement withdrawals―which assumes retirees use that percentage to set a starting dollar amount for annual portfolio withdrawals and then adjust that amount each year for inflation―should probably be a bit lower (3.7%, to be precise).

Ratcheting down the sustainable withdrawal rate has major implications for retirement savers. Because withdrawal rates are based on a percentage of portfolio value, one way to estimate how much retirement savings you might need is to use this percentage to back into a dollar amount for savings needed at retirement.

For example, an investor who estimates she’ll need $40,000 in retirement income would need a portfolio value of $1 million at retirement assuming a withdrawal rate of 4%. (This is $40,000 divided by 4%, or 0.04). Changing the withdrawal rate to 3.7% means she would need a portfolio value of $1,081,081 ($40,000 divided by 3.7%, or 0.037). In other words, she’d need to accumulate about 8% more in retirement savings.

2: Inflation Has a Cumulative Effect

The most recent inflation report showed a year-over-year increase of 2.9%, which is still above the Federal Reserve’s 2% target but well below the 9.1% peak in June 2022.

But even if inflation continues to moderate, it still creates significant challenges for retirement savers. This is because past inflation typically creates a permanent increase in the baseline cost of required spending. Thanks to elevated inflation rates in recent years, the cost of essential goods such as food, clothing, shelter, and gasoline is now significantly higher than it was a few years ago. An annual “consumption basket” priced at $40,000 as of the end of 2020 would cost about $49,100 by Nov. 30, 2024.

Although many workers might get wage increases during periods of rising inflation, it still requires saving more to cover the higher cost of living. When combined with the impact of a lower safe withdrawal rate, that means someone who previously planned to save $1 million for retirement would now need to save about $1.3 million ($49,100 divided by 0.037).

3: Most Retirement Savers Are Already Running Behind

Notwithstanding the positive developments I mentioned earlier, the average retirement saver most likely was already undersaving, even before accounting for the impact of lower future returns and higher inflation.

As John Rekenthaler detailed in a previous article, another Morningstar research report found that a large percentage of retirement savers are likely running behind. Jack VanDerhei and Spencer Look from Morningstar’s Center for Retirement & Policy Studies started with data on average retirement savings balances from the Federal Reserve Survey of Consumer Finances. They then conducted a forward-looking Monte Carlo analysis testing 1,000 potential “life paths” based on different savings rates, withdrawal patterns, job changes, and healthcare expenses, incorporating empirical data on retiree spending and healthcare costs. They used this data to estimate the percentage of working Americans who are on track to fund 100% of the forecast retirement costs (including healthcare).

As shown in the table below, estimated success rates range from only 53% for Gen X to 63% for Gen Z.

Projected success rates are considerably better for retirement savers in the highest income quartile, but much worse for lower-income workers. That’s partly because more than 40% of American workers don’t currently have access to a 401(k) plan.

Save More if You Can, but Don’t Panic

All of this might paint a pretty depressing picture for retirement savings, but there are a few reasons to be more sanguine. For one, retirement withdrawals aren’t set in stone.

As I covered in a recent article, there are various flexible withdrawal strategies that can significantly increase sustainable withdrawal amounts―and therefore decrease required savings. Some of the major strategies include forgoing the inflation adjustment after any years when your nest egg loses value, employing a “guardrails” strategy that involves cutting back on withdrawals in down markets but giving yourself a raise in good ones, or using required minimum distributions to determine the withdrawal amount. Investors who are willing to tolerate more uncertainty around the odds of success can also afford to save less.

In addition, we’ve written about numerous nonportfolio income strategies that can improve the odds of success, such as delaying retirement, cutting back on planned spending, maximizing Social Security and pension payouts, supplementing retirement income by purchasing an annuity, or tapping into income from other sources, such as rental properties or part-time work.

Finally, it’s important to emphasize that our numbers for both sustainable withdrawal rates and required savings amounts are based on conservative estimates for future market performance. If the market continues chugging along, retirement savers might find themselves in considerably better shape. In the meantime, though, it’s prudent to save as much as you reasonably can and check in periodically to see whether your retirement savings are on track.