Data & Research July 31, 2024

Morningstar: 45% of Americans Will Run Short of Funds if Retiring at 65

A new retirement savings simulation tool by the financial services firm signals widespread retirement shortage.

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Morningstar Inc’s retirement group has added to the ongoing dialogue around a retirement savings shortfall for many Americans with a study based on a new retirement savings simulation tool.

According to the investment and retirement services provider, about 45% of Americans will run short of money in retirement if they retire at the traditional age of 65. That scenario is starkest for those in the private sector, where company-sponsored retirement plans are less prevalent, according to the findings; by comparison, only 29% of public-sector workers are forecast to face similar savings shortfalls.

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“Indeed, the public sector is the industry with the highest likelihood of a worker having access to a retirement plan,” Morningstar’s researchers wrote in the report. “Second, the results were better for industries wherein DB plans are more common. Again, the public sector stood out in this regard, as did the manufacturing sector and miscellaneous services sector.”

Morningstar’s findings point, overall, to the need for Americans to save more and for longer in tax-deferred savings programs, with results improving dramatically for people able to take that path.

The report is based on a new tool developed by Morningstar to be used by its research center, that considers “individual characteristics, healthcare costs and projected longevity to assess retirement income sufficiency.” The model draws in part on Morningstar’s proprietary data, including participant data from about 1,000 defined contribution plans. It also uses publicly provided databases for its analysis including the Federal Reserve Board’s Survey of Consumer Finances, the University of Michigan’s Health and Retirement Study and Consumption and Activities Mail Survey.

The researchers are also using the model to “simulate 1,000 retirement outcomes, which entails projecting all kinds of variables, such as savings rates, investment returns, retirement expenses, and health states (certain health states have associated long-term services and supports costs),” Spencer Look, associate director for the Morningstar Center for Retirement & Policy Studies, explains by email.

Delay If You Can

According to the report, if Social Security remains as it is today, delaying retirement to 67 will reduce those with a retirement savings shortfall to 38% of the population; if claiming Social Security is delayed to age 70, that drops lower to 28% of the surveyed group.

Meanwhile, among the generations, baby boomers and Generation X are most likely to experience retirement shortfalls, according to the report.

About 47% of Generation Xers and 52% of baby boomers “may experience retirement shortfalls” as compared to 37% for Generation Z and 44% for Millennials. Part of those findings are related to the amount of time people have to save, along with being amid the heart of the “transition from a DB-dominant system to a DC-dominant system,” the researchers wrote.

For those still in their working years—Generation Z, Millennials, and Generation X—if they are not participating in a qualified retirement plan, their retirement funding ratios (projected income versus projected expenses) take a dive. Morningstar’s report shows that 57% of people not participating in a DC plan may run short of money in the future, as compared to just 21% for those slated to contribute to a plan for 20 or more years.

“There is a retirement crisis …. for those who do not or are unable to participate in a defined-contribution plan,” the researchers conclude.

The report also details data showing that lower-income workers are more susceptible to lacking enough savings for retirement, and that Hispanic and Black Americans are in worse shape for retirement.

According to the findings, 61% of Hispanic Americans and 59% of non-Hispanic Black Americans are projected to run short of money in their later years, compared to 40% for both non-Hispanic other Americans and non-Hispanic white Americans. The disparity is “largely a function of the racial wealth gap, specifically the disparities in retirement account balances,” according to the report.

Crisis Or Challenge?

Morningstar laid out its findings in a report titled: “Beyond the Retirement Crisis Headlines: Why Employer-Sponsored Plans Are the Key to Retirement Adequacy for Today’s Workers.”

That “retirement crisis” language aligns with a rallying cry heard from others in the financial service space recently, including BlackRock’s Larry Fink writing in his annual report in March that the U.S. should consider a “retirement rethink.”

Other voices in the retirement space are pushing for more nuanced language. In a report published earlier in July, PGIM noted that while many people may feel there is a retirement crisis, their savings often do not paint as dire a picture.

“While I understand the perspectives and obstacles Americans face when it comes to saving for retirement, I prefer to think of the current state as a challenge, not a crisis,” David Blanchett, PGIM’s DC solutions head of retirement research and portfolio management, wrote in the report. “Access issues notwithstanding, our retirement system is one of the best in the world, and we’re making changes to increase availability of workplace retirement plans and improve behaviors among employees participating in the plan to ensure they can live a better life, longer.”

In its report, Morningstar proposes various solutions for the retirement sector, including expanding access to DC plans for workers, working on improving participation rates for those with access, and implementing plan design features such as auto enrollment and escalation.

Going forward, Morningstar’s research team will use the new model to consider various parts of the retirement investing space, including “the impact of broader economic factors and policy changes on retirement security outcomes, focusing on topics such as the Saver’s Match, auto-portability, annuities, and other policy proposals to change or overhaul the 401(k) system.”

Data & Research July 31, 2024

Retiree Health Care Costs Continue Rising, Milliman Finds

Health status, location and age at retirement all affect how much a retiree can expect to spend on health care costs.

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The average healthy 65-year-old retiring in 2024 is projected to spend a significant amount on health care over the course of their remaining lifetime, according to the 2024 Milliman Retiree Health Cost Index.

The two most common health care coverage options chosen by Medicare-eligible retirees are Medicare Advantage Part D and Original Medicare with Medigap plus Part D. A healthy 65-year-old man retiring in 2024 with a MAPD plan is projected to spend $128,000 on health care in his remaining lifetime, and a woman with the same coverage is projected to spend $147,000 in her remaining lifetime, according to Milliman.

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Health Care Costs on the Rise

In order to afford these costs, Milliman projected that a man with a MAPD plan needs to have at least $86,000 in savings and a woman with the same coverage needs at least $96,000 in savings. The Milliman Index projected that this is the amount of savings (net of taxes) needed at age 65 to pay a retiree’s remaining lifetime health care “total spend,” assuming an investment return of 3% per year.

For a 65-year-old man retiring in 2024 with Medicare plus Medigap plus Part D, the costs are even higher, as they are projected spend approximately $281,000 on health care expenses throughout retirement and a woman with the same coverage is projected to spend $320,000.

The difference in cost is largely because women on average live longer than men, according to Milliman. The retired man was projected to live until 88, and the woman until 90, in Milliman’s calculation.

The cost of health care in retirement will also depend on several other factors, Milliman explained, such as when someone retires, where they live during retirement and what Medicare benefit plan they choose. The cost of Medicare Advantage, Medigap and Part D plans can vary greatly by state. For example, in Florida, a 65-year-old retiring in 2024 with a lifespan of 88 can be expected to spend upwards of $340,000 on health care, as opposed to around $260,000 to $280,000 in Texas.

Retirees have less control over factors such as health status or how long they will live—both of which are primary drivers of how much their health care will cost.

Milliman also measured the savings needed for a healthy 65-year-old couple in 2024 compared with 2023. A hypothetical couple retiring in 2024 will need to save approximately $7,000 more than they would have in 2023 if they have Original Medicare plus Medigap and Part D coverage, and $8,000 less if they have Medicare Advantage plus Part D coverage, all else being equal.

How Health Care Costs Have Changed

As a result of the Inflation Reduction Act, there were significant changes to Medicare Part D in 2024. Out-of-pocket expenses were significantly reduced because of the law’s elimination of cost sharing in the catastrophic phase of insurance coverage, but as a result, this increased the plan liability, driving an increase in premiums.

In addition, there has been continued growth in spending on major brand name drugs like GLP-1s—which includes medications like Ozempic and Wegovy—even when only covered for diabetes and not obesity, as well as SGLT2s, that slow heart failure, and certain autoimmune drugs. These costs also contributed to increasing premium and out-of-pocket costs, and the trend is expected to continue over the next couple of years, according to Milliman. Higher prescription drug costs have also increased short-term health care cost expectations over the next couple years.

Impact of Retiring Earlier vs. Later

Most people cannot apply for Medicare until age 65, so retiring early means health care costs can be much higher for the individual. For example, if someone retires five years before they are eligible, at age 60, they can expect to pay 56% more for health care expenses if enrolled in Original Medicare plus Medigap (Plan G) plus Part D, and 86% more for health care expenses if they enroll in a MAPD plan than they would if they waited until age 65 to enroll.

Conversely, delaying retirement allows retirees to boost savings and continue earning income and employer-sponsored benefits like health care. Retiring at age 70, for example, would allow a retiree to pay 29% less on health care expenses than if they retired at 65 and are enrolled in Original Medicare plus Medigap plus Part D. They would pay 30% less for health care with a MAPD plan.

“Healthcare expenses are an important and sometimes overlooked component of retirement planning,” said Robert Schmidt, a Milliman principal and co-author of the Retiree Health Cost Index, in a statement. “By taking a realistic look at their health status and healthcare expenses, and then budgeting accordingly, people can take steps to enjoy a less stressful, financially healthier retirement.”

The complete Milliman Retiree Health Cost Index can be found here.

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