• The Center for Retirement Research:
  • The National Retirement Risk Index Shows Half Still Falling Short (2014)
  • The National Retirement Risk Index Dropped to 39% (2024)
• The Journal of Political Economy:
  • Are Americans Saving “Optimally” for Retirement?
• Why The Empty Nest Transition Is Crucial For Retirement Success
• NEW RESEARCH: Your Plan Is Overestimating Retirement Costs (By 20%)

One multi-decade retirement study suggests that nearly half of all working households are at risk of falling short in retirement. 

Another well-known academic study came to a very different conclusion: fewer than 20% of households were behind on their estimated retirement savings target.

That gap is hard to ignore, and it raises an important question for anyone who looks at their retirement account in their 40s or 50s and worries they’re too far behind: 

How much does where you are today really tell us about where you’ll end up? 

In this episode, I’m going to explain why the “save a percentage of your income” rule tends to break down for families, why the years when saving feels impossible may be more normal than you’ve been led to believe, and how your 50s and early 60s can become one of the most important saving windows of your life. My hope is that when we’re done, you’ll have a better way to judge whether you’re truly behind, and a clearer idea of what to do next.

Welcome to another episode of the Stay Wealthy Retirement Show. I’m your host, Taylor Schulte, and every week I cover the most important financial topics to help you stay wealthy in retirement. Ok, onto today’s episode.

Are You Really Behind on Retirement? 2 Studies Disagree (46% vs. Under 20%)

Let’s start with the two research efforts, because the difference between them is really the whole story.

The first comes from the Center for Retirement Research at Boston College, which publishes the National Retirement Risk Index. In short, this index estimates the percentage of working-age households that may be unable to maintain their standard of living in retirement.

In its latest update, about 39 percent of households were considered “at risk.” That’s an improvement from prior years, which is driven in large part by higher home values across the country, according to the researchers.

But one year doesn’t tell the whole story. Across the Index’s published estimates since 2004, the average is 46 percent. 

So over time, almost 5 out of every 10 working households have been considered at risk of falling short in retirement. 

But an older, well-known academic study came to a very different conclusion. In a 2006 Journal of Political Economy article, researchers built a detailed model to estimate how much individual households actually needed for retirement. They accounted for things like future income, taxes, Social Security, pensions, healthcare costs, as well as how long people might live.

Their finding was much more encouraging, which suggested that fewer than 20% of households were behind on their estimated retirement savings target. And for most of those that were behind, the gap was fairly small.

So we have one respected source suggesting that nearly 50% of working households may fall short in retirement, while another found that fewer than 2 in 10 workers were below their estimated savings target.

Now, that doesn’t mean one is right and the other is wrong. They’re asking different questions, and more importantly, they’re making different assumptions about what retirement spending looks like.

The Boston College Index essentially asks: Can a household replace enough of its pre-retirement income to maintain its current standard of living? That’s useful, but it can make retirement look harder when today’s spending is unusually high.

Think about a 50-year-old who still has kids at home. Maybe they’re paying for private school or travel sports, buying more groceries, taking more expensive family vacations, covering activities with friends and transportation costs, all while still carrying a mortgage. That can be a very expensive stage of life, but it doesn’t necessarily tell us what they’ll need at 70 or 80, when the kids are independent and a healthy amount of those expenses are gone.

The second study published by the Journal of Political Economy takes a broader life-cycle view. It allows income, taxes, family needs, and spending to change over time, and that can dramatically change the picture, as we learned in episode 295 last month when I discussed the straight line vs. smile vs. smirk.

And this is important because, for many families with kids, especially for those in higher cost of living locations, the years when they feel most “behind” are also the years when they’re carrying the most financial responsibility. As some of those expenses disappear, two things can happen: spending falls, and the ability to save rises.

And that’s the part I want to focus on today. 

Specifically, I want to share why being behind at age 50 may not be as bad as it looks. Because, a retirement projection based only on today’s spending and today’s account balance can miss a lot of what may change over the next 10, 15, or 20 years.

And to understand why that matters, it helps to look at where the familiar idea of “saving a percentage of your income” came from in the first place.

Where the “Save a Percentage” Rule Comes From

The traditional approach to retirement saving is simple, and that simplicity is a big part of its appeal. Pick a percentage of your income, save it every year, invest in broad-based index funds, and give your money time to compound. The higher the percentage and the longer you save, the better your odds of reaching your goal.

Michael Kitces has a great example from the work he’s published on this topic that puts some numbers around this. Say you’re 25 years old, earning $50,000 a year, and saving 10% of your income. Your income rises 3% each year with inflation, your savings rise along with it, and your portfolio earns an average of 8% per year. Forty years later, you’d have roughly $2 million. 

Now, as he quickly notes, $2 million in 40 years won’t buy you what $2 million buys today. At just 3% inflation, the purchasing power of those future dollars gets cut by nearly two-thirds. But even after accounting for that, a conservative 4% withdrawal rate from the portfolio, combined with Social Security, could replace the lifestyle you had while working. So on paper, the rule does work, but there’s also real economic theory behind it. 

In the 1950s, economist Franco Mo-Dee-Lee-Ann-Ee Modigliani helped develop what became known as the life-cycle hypothesis. 

The basic idea is that people generally want to maintain a reasonably consistent standard of living throughout their lives. To do that, they spend less than they earn during their working years and save the difference, so they have something to draw from when the paychecks stop. 

That idea has held up fairly well. Decades of research suggest many households do behave this way, saving during their working years and drawing those savings down later. 

Some researchers have even developed savings-rate guidelines showing how much people might need to have saved at different ages to reach their retirement goals – you’ve probably seen versions of those popular “am I on track for retirement charts.”

But it’s important to highlight that smoothing your spending over a lifetime is not the same as saving a fixed percentage of your income every single year. The theory supports the first – the rule of thumb assumes the second. 

You might think of it like setting cruise control for a 40-year road trip. On a flat highway, one speed works just fine. But family finances aren’t a flat highway. For many households, there’s a long stretch where expenses climb, financial responsibilities pile up, and saving becomes harder, and that’s where a fixed-percentage savings strategy can start to break down. And when it does, smart, intentional savers can be left feeling like they’re falling behind or putting their retirement at risk. 

So let’s look at where that pressure typically comes from.

The Years When Saving Stops

In practice, a steady savings percentage, like the 10% per year in our prior example, usually falls apart in one of three ways as documented in Kitces’ research.

The first is lifestyle creep. Your standard of living rises over time but your savings rate doesn’t rise with it, so you’re no longer saving enough to support the retirement lifestyle you now expect. 

The second is a big raise. You get promoted, spending rises with your higher income, and your savings rate stays exactly where it was. This well-documented challenge is why many financial planners recommend saving part of every raise before the extra income gets absorbed into your lifestyle. 

The third, and often the biggest disruption, is having kids. If you’re a parent, you don’t need me or a government report to tell you that kids are expensive – you have the receipts. But for some perspective, recent national estimates suggest that raising one child from birth through age 17 can cost a middle-income family around $310,000 on average after adjusting for inflation. And that doesn’t include college tuition or some of the bigger financial decisions that often come with raising a family, like buying a larger home, moving to a more expensive neighborhood, buying larger vehicles, or cutting back on work to help with childcare. 

Now think about a couple that was comfortably saving 10 or 20 percent of their income before kids. Suddenly, a much larger share of their paycheck is being pulled toward the cost of raising a family, and as a result, for many households, retirement savings drops sharply. For some, it stops altogether. And in tighter years, some families may even take on debt just to keep everything moving.

As many listeners know, I have three young kids that seem to get more expensive by the day, so I’m right in the middle of these years myself. And I think it’s important for parents to hear that saving very little, or even nothing, for retirement during certain years of raising a family is more normal than traditional retirement advice might lead you to believe.

That, of course, doesn’t mean those years are free. Every year you don’t save is a year you miss out on compounding, and over time, that can certainly leave you with less money for retirement. 

So, families in this stage usually face some version of the same tradeoff. You can cut spending elsewhere to keep retirement contributions going, or you can accept a lower savings rate for a period of time knowing you may need to make up some ground later. 

And even families who continue saving throughout these years usually aren’t saving the same percentage year after year. There’s simply less room in the budget when the kids are in the house. But as those expenses begin to disappear, the math can change quickly, and suddenly there may be a lot more room to save. 

Which is why I think some of the guilt aimed at parents in their 30s, 40s, and even 50s misses an important part of the story. Because when the kids eventually leave, many families enter a very different financial season. Expenses can fall at the same time earnings are near their peak, creating what may be one of the best opportunities they’ll ever have to catch up on retirement savings. 

The Window That Opens When the Kids Leave

And that helps explain a pattern we see in survey after survey which is that people in their 50s report feeling well behind on their retirement savings goals and unsure whether they’ve saved enough. And when you think about what many of those households just went through, that’s not surprising at all. They’ve only recently come out of the most expensive stretch of their lives, and their retirement accounts reflect it.

This is where the traditional “save a percentage of your income” rule can be misleading. Saving 10 or 20 percent may simply be unrealistic when you’re raising kids, paying for childcare, activities, college, and everything else that comes with family life. Then in your 50s and early 60s, once some of those expenses disappear, saving 10 or 20 percent may actually be too low. 

At that point, households generally follow one of two paths. 

On the first path, spending stays roughly where it was. The tuition payment ends, and a new car payment takes its place. The kids’ activities disappear, and the travel budget grows. Nobody necessarily makes a conscious decision to do this – there’s simply more money available, and over time, spending expands to absorb it. For that household, the retirement shortfall may stick around or even grow, because now the same nest egg has to support a more expensive lifestyle. 

On the second path, spending falls as the cost of raising a family falls. The house that once supported four or five people now supports two. College bills disappear. Activities, groceries, insurance, and other expenses come down, and a healthy slice of that money gets redirected toward retirement. A couple that struggled to save 5 percent of their income may suddenly have room to save 20 or 30 percent, sometimes without reducing the lifestyle they actually enjoy. That’s the opportunity that can’t be ignored.

The dollars that used to support the kids are now available for something else. 

And what you choose to do with those dollars during your 50s and early 60s can have an enormous impact on how prepared you are when retirement finally arrives.

To highlight the impact, here’s an example: 

Imagine a couple whose youngest child is finally off the payroll in their early 50s. For years, a meaningful share of their income has gone toward the added costs of supporting a family: tuition, groceries, activities, transportation, insurance, a larger household, and all the other expenses that come with raising kids. As some of those costs begin to disappear, let’s say they free up about $3,000 per month.

Instead of letting that money gradually work its way into a more expensive lifestyle, they decide to redirect it toward retirement. Then, five years later, they pay off the mortgage, which frees up another $2,000 per month for them to add to their retirement savings catch-up plan.

So for the first five years, they invest $3,000 per month. Once the mortgage is paid off, they increase that amount to $5,000 per month for the remaining 10 years. If those investments earn an average annual return of 8%, their contributions alone could grow to about $1.4 million by retirement. Even if you drop the return assumption to 6%, they still end up with $1.2 million in this scenario.

And again, that’s starting from zero at age 50. If they already had some money saved for retirement by the time the kids were out of the house, the outcome gets even better. And this is where compounding can be easy to underestimate. Because, even in a traditional 40-year savings plan, a large share of the final balance is often accumulated in the later years, when the portfolio is bigger and each year of growth is working on a much larger base. So if a household enters its 50s with some retirement savings already in place and suddenly has room to save much more aggressively, the progress can happen faster than a fixed savings-rate rule might lead you to believe. 

The tax code can give them another boost. Starting at age 50, workers can make additional catch-up contributions to workplace retirement plans, and under SECURE 2.0, those ages 60 through 63 have access to an even larger catch-up contribution. 

Of course, the math in our example still comes with an important caveat. An 8% return is a long-term average, not a promise, and 15 years leaves less room for error than 40. Markets won’t necessarily cooperate with your exact retirement timeline, so that uncertainty has to be accounted for in the plan. 

But I think the bigger risk for many families is simply letting those first few empty-nest years pass without making a conscious decision about what to do with the extra cash flow. Once that money gets absorbed into a higher level of spending, it can be difficult to pull it back. So if you know several major expenses are about to disappear, decide ahead of time how much of that money you’ll redirect toward retirement. Even a few thousand dollars a month, invested consistently for the next 10 or 15 years, can have a meaningful impact on where you end up.

That, of course, assumes you actually have 10 or 15 years to work with.

Before We Wrap Up: One Honest Caveat

Because some of you may be thinking, “But Taylor, my kids didn’t leave until I was almost 60, so this catch-up window you’re describing barely exists for me.” 

That’s a fair point, and it’s become more common as people have children later in life. In fact, according to the CDC, the average age of first-time mothers in the U.S. has risen from about 21 years old  in 1970 to nearly 28 years old today. And when the child-raising years begin later, many of those expenses naturally extend further into your 50s and closer to retirement. 

At the same time, retirement has shifted later for many people too. Social Security’s full retirement age is now 67 for anyone born in 1960 or later, and plenty of people continue working well into their 60s. So a later empty-nest window doesn’t necessarily eliminate the opportunity – you may still have several productive years to make meaningful progress. 

However, it’s worth noting that the later that window opens, the less margin you have if life doesn’t go according to plan. A health issue, a layoff, or a caregiving responsibility in your 50s or early 60s could reduce your income or shorten the number of years you have available to catch up.

So, the point of today’s discussion isn’t that everyone should count on their 50s or 60s to rescue an underfunded retirement, it’s that a snapshot at age 40 or 50 can leave out some very meaningful changes (and opportunities) that may still be ahead. Lower expenses, higher earnings, and a greater ability to save can dramatically improve the picture if those opportunities materialize. So, those years shouldn’t be taken for granted, but they shouldn’t be ignored either. If the window opens, which is more likely to happen than not, and you have the ability to take advantage of it, it can become a very powerful part of your retirement plan.

Bottom Line

If there’s one idea I hope you take away from today’s episode, it’s that your savings rate doesn’t have to stay fixed for 40 years just because that’s what the textbook says. Your ability to save changes as your life changes, and a rule of thumb that ignores that reality can make parents feel unnecessarily behind when expenses are at their highest, while also underestimating what they may be capable of later. 

So if you’re in your 40s or 50s and the numbers don’t look exactly where you hoped they would, take it seriously, but look at the full picture. What expenses may disappear? How might your income change? How many working years do you realistically have left? Will a stay at home spouse decide to go back to work after the kids leave? And how much more could you save once some of today’s financial responsibilities are behind you? 

Those questions can tell you a lot more than simply comparing today’s savings rate or account balance to a rule of thumb or “retirement savings progress” chart. And if you have adult kids who are currently in the thick of childcare bills, travel sports, and all the other costs that come with raising a family, this may be worth sharing with them. They may need the reminder that a difficult savings season today doesn’t define where they’ll end up. What matters is recognizing when their financial life changes and being ready to take advantage of the opportunities that come along with it. 

Thank you, as always, for listening. To view the research and resources referenced in today’s episode, just head over to youstaywealthy.com/301.

Disclaimer

This podcast is for informational and entertainment purposes only, and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.