A recent study by Morningstar's Center for Retirement and Policy Studies has indicated that nearly half of US households may encounter financial difficulties if they retire at 65, with this percentage rising to 54% for those retiring at 62. This situation arises from the transition from a defined-benefit pension system, where employers provided a fixed monthly pension, to a defined-contribution system, requiring employees to save and invest a significant portion of their income for retirement.

The demographic groups most affected by this shift are Generation X, with the oldest members approaching retirement, and the Baby Boomer generation, some of whom are already in their early 60s. Consequently, the study suggests that these generations are more susceptible to financial shortfalls in retirement compared to Millennials and Generation Z. The researchers attribute this to the limited time these generations have had to accumulate savings due to the change in pension systems.

However, the preparedness of US workers for retirement varies significantly and is largely dependent on individual circumstances and employer-provided opportunities. The study aimed to pinpoint specific factors that contribute to the risk of financial insufficiency in retirement.

Participation in an employer-sponsored retirement savings plan, such as a 401(k), for a minimum of two decades significantly reduces the risk of financial shortfalls in retirement. The study estimates that only 21% of households who consistently save in such plans will face financial difficulties. Despite this, nearly half of US workers, according to Morningstar, lack access to such plans. Furthermore, of those who do have access, approximately 16% choose not to participate, highlighting a significant retirement crisis for those unable to save through defined-contribution plans.

In the private sector, the decision to offer retirement savings plans rests with employers, with larger companies more likely to provide such benefits compared to smaller ones. Independent contractors and temporary workers often find themselves excluded from these plans. Conversely, public-sector employees face a lower risk of financial shortfalls in retirement, as they are more likely to have access to both defined-benefit pensions and 401(k)-like defined-contribution plans.

The study's projections are particularly relevant for those with over two decades to save before retirement. For the older members of Generation X and the younger Baby Boomers, who have less time to save, the same principles apply. Consistent saving and avoiding actions that undermine retirement savings, such as pre-retirement withdrawals or cashing out upon job termination, can improve retirement prospects.

For the youngest Generation X members, born between 1975 and 1980, there is still an opportunity to adjust their savings strategy. However, this depends on their access to tax-advantaged plans and their income levels. Morningstar estimates that 48% of Generation X individuals do not have access to a defined-contribution plan, and approximately 79% lack a defined-benefit pension.

A study by the National Institute on Retirement Security last year identified income as the primary factor determining who has managed to save for retirement and who has not. The report noted that retirement savings for Generation X are heavily concentrated among the highest earners.

On a more positive note, among Generation X individuals who have access to a 401(k) or similar plan, only 7% opt not to participate. Labor economist Teresa Ghilarducci, author of "Work, Retire, Repeat: The Uncertainty of Retirement in the New Economy," has long argued that the US's individual-directed retirement system has failed many workers who have dedicated decades to their careers but struggle to save sufficiently.

Policymakers have introduced changes to facilitate savings, such as the Secure 2.0 law. Features like automatic enrollment and target-date funds in 401(k)s have contributed to a lower risk of retirement shortfalls for Millennials and Generation Z compared to older generations.

Looking ahead, the Retirement Savings for Americans Act, a bipartisan bill with support in both the House and the Senate, may be reintroduced in the next Congress. The bill, inspired by Ghilarducci and former Trump economic adviser Kevin Hassett, aims to create a portable, tax-advantaged retirement savings program for millions of low- and middle-income workers, offering a federal matching contribution.

Pennsylvania Republican Congressman Lloyd Smucker, a co-sponsor of the bill, emphasized the need for the bill, stating, "Over half of working employees lack access to the tax-advantaged retirement benefits that many higher-income earners take advantage of to save. Additionally, as the workforce continues to innovate and more Americans become categorized as ‘gig workers,’ the reliance on traditional employer-sponsored plans causes too many workers to slip through the cracks."

However, even if the bill becomes law, it is unlikely to benefit those nearing retirement within the next decade. For this group, extending their working years, maximizing savings while still earning, and reducing expenses may be the most effective strategies to ensure financial stability in retirement.