Do Millennials Face a More Precarious Retirement Outlook?

Ted Godbout

While retirement is still more than two decades away for Americans born in the 1980s, a new report finds that the retirement outlook for early Millennials is reason for concern—particularly compared to older generations.  

By the time early Millennials—those born between 1980 and 1989—reach age 70, they will face a heightened risk of lower living standards in retirement despite a median income topping previous generations, according to the report by the Urban Institute.  
 
In “How Might Millennials Fare in Retirement?,” researchers Richard Johnson and Karen Smith estimate that nearly 4 in 10 (38%) early Millennial 70-year-olds will be unable to cover basic needs or replace at least 75% of the average annual earnings (adjusted for inflation) they and their spouse received from ages 50 to 59—a common benchmark for the ability to maintain preretirement living standards. By comparison, for 70-year-old late Boomers (born between 1955 and 1964), 30% are expected to fall short of this income adequacy threshold; that figure drops to 28% for pre-Boomers (1937–45).

The report uses the Urban Institute’s Dynamic Simulation of Income Model 4 (DYNASIM4) to assess retirement prospects for future generations, with a special focus on early Millennials. The model combines data from multiple sources—including Surveys of Income and Program Participation, the Current Population Survey’s Annual Social and Economic Supplement, and the Survey of Consumer Finances—to project how various demographic, economic and social trends might play out over the next 40 years to shape future retirement incomes. The researchers note that their analysis focuses on age-70 income because most people have stopped working by then. 

The authors explain that their projections of income adequacy depend on the share of earnings that retirees are assumed to need to replace in order to maintain their preretirement living standards, which is uncertain. For instance, when they reduce the assumed required replacement rate from 75% to 60%, their projection of the share of early Millennials with inadequate retirement income falls from 38% to 29%. In contrast, when they increase the required replacement rate to 90%, the share with inadequate income rises to 46%. Still, under all their replacement rate assumptions, the projected share of financially insecure retirees is substantially higher for the early Millennial cohort than for the pre-Boomer cohort.

Demographic Differences

According to the research, retirement security is projected to be “especially precarious” for early Millennials of color, those with little education and limited lifetime earnings, and those who are not married. 

Here, the findings show that projected age-70 incomes are higher for men, non-Hispanic white adults, married adults, and college graduates than for women, people of color, single adults, and people who did not attend college. Among early Millennials, 53% of Hispanic adults, 42% of black adults, 66% of people who did not complete high school, and 50% of people who never marry are projected to receive inadequate income at age 70. 

Johnson and Smith project that many of these differentials will narrow over the coming decades as projected retirement incomes grow for people of color and women, largely reflecting lifetime earnings gains for these groups. However, projected age-70 income differentials by lifetime earnings will increase over time. 

Thus, retirement outcomes are projected to become even more unequal, with median age-70 income for early Millennials increasing 51%—relative to pre-Boomers—for the top fifth of lifetime earnings, 22% for people in the middle fifth and 31% for people in the bottom fifth. These differentials largely reflect ongoing growth in earnings inequality, as earnings have increased more rapidly near the top of the earnings distribution than in the middle or near the bottom, the report notes. 

Other Factors

The researchers do acknowledge that little consensus exists about how future generations will likely fare in retirement, as some studies warn of a looming retirement crisis, while others are more sanguine, concluding that most people are saving adequately and that economic growth will boost future retirement incomes. 

Still, other factors include retirement ages and rising out-of-pocket spending on health care and long-term care services and supports. “How long people work, which depends partly on how health trajectories evolve, and how rapidly future wages grow will also help determine financial security for future retirees,” Johnson and Smith observe. The Great Recession and pandemic could also significantly disrupt retirement savings for people born in the late 1970s and early 1980s, who were in their 20s at the time.

Rising out-of-pocket spending on health care and long-term care services and support also poses an additional threat to future retirees’ financial security. Although Medicare covers nearly all older adults, out-of-pocket spending on Medicare premiums, premiums for supplemental private insurance, copayments, and uncovered services can be financially burdensome, the report notes. 

“The retirement outlook for early Millennials is concerning, but retirement is still more than two decades away for Americans born in the 1980s, and their financial security in old age will hinge on several factors that have yet to play out,” the authors note. “The future course of stock market returns, interest rates, housing prices, and inflation will affect future retirement incomes.” 

Social Security’s Impact

Meanwhile, Social Security’s long-range financing gap poses additional risks to retirement income. 

The authors project that the share of early Millennials with age-70 income insufficient to meet basic needs or maintain their preretirement living standards—assuming a 75% replacement rate standard—will increase to 49% if policymakers fail to shore up Social Security finances. 

Drilling down further, if policymakers fail to address Social Security, the researchers project that 53% of black adults in the early Millennial cohort, 62% of Hispanic adults, 75% of adults who did not complete high school, 57% of adults with only a high school diploma, and 74% of adults in the bottom fifth of the lifetime earnings distribution will receive inadequate retirement income.