A recent article in the Wall Street Journal tells a sad tale of retirement preparedness: The typical pre-retiree baby boomer has less than one-quarter of what he or she needs in a 401(k) plan to retire.

In my view, this assessment is entirely too bleak. As I’ve noted previously, estimating retirement readiness for an entire generation is a difficult task, and the result is sensitive to the assumptions used. Moreover, the issue isn’t a black-and-white question—who’s ready, who isn’t?—but one of degree.

There is certainly, and has always been, a cohort of older Americans who are well-prepared for retirement. I use the rough rule of thumb that about one-third of boomers are well-prepared, but estimates vary. This group includes many who have had high incomes. But it also includes those individuals, with low and moderate incomes, who have had the patience and planning skills to save for the future.

At the other extreme are those with no meaningful resources other than Social Security. They are completely unprepared for a traditional retirement. Again estimates of this group vary, but a good rule of thumb is another third of older Americans.

Then there are those in the middle—Americans who have taken the steps to save for retirement, and have it within their means to get to a reasonable retirement standard of living. For this group, in addition to needing to save more, a major challenge is having to work longer until (a delayed) retirement age. Alternatively, the retirement model that many have been talking about is “phased retirement” or “downshifting”—in other words, continuing to work, usually in a position with reduced hours or reduced stress, in a role that produces additional income.

Underlying the retirement readiness theme are two common assumptions. One is that boomers have been spendthrifts, and so find themselves in a financial bind. There is actually some academic research to support this theory. Boomers have arguably been better educated and better paid than their parents, but retirement income-replacement rates are expected to be lower.* It’s not that the typical boomer will be worse off than his or her parents—it’s that the typical boomer should have been considerably better off, with better income and education, but isn’t due to lack of savings. (How much of this is due to the growth of easy credit in the post–World War II period is something worth speculating about.)

A second assumption is that 401(k) plans are all to blame for the deterioration. This claim, while endlessly popular, is hard to justify. One study from 2004 found that the difference in wealth between married couples relying on defined benefit (DB) plans and those relying only on 401(k) plans was about 3%—economically, a trivial difference.** To be honest, given the state of the data available to analyze this question, the real answer is that no one will ever have complete information to prove this point definitively. You’d need good information about DB and 401(k) plans for the past 40 or 50 years, which we don’t have, alas. Researchers have also found big problems with 401(k) data collected for the federal government’s Health and Retirement Study.

The real retirement readiness story isn’t about the typical boomer, who I remain less worried about. It’s about the pockets of individuals who have traditionally been the most vulnerable. These groups include (some) women, minorities, single or divorced individuals, and those with low levels of education. These are the “risk factors” for lack of retirement readiness, and that is where the real story lies.

* Butrica, Iams, and Smith, in Madrian, Mitchell, and Soldo, “Redefining Retirement: How Will the Boomers Fare?” Oxford University Press, 2007.
** Dushi and Webb, “Annuitization: Keeping Your Options Open,” Boston College Center for Retirement Research, working paper 2004–04.

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