Retirement account balances have increased substantially for high-income households. These factors help explain why

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When it comes to retirement savings, the gap between the haves and the have-nots has widened, according to a new report from the Government Accountability Office.

The median retirement account balance for high-income households was nine times that of middle-income households in 2019 — $605,000 compared with $64,300, respectively, the research found.

That gap is “significantly greater” than it was in 2007, when high-income households had a median retirement account balance that was about four times higher than middle-income households — about $333,000 versus $86,800, respectively.

Meanwhile, the ratio of median balances for high-income to low-income households was relatively unchanged — with a 15 times difference in 2019 versus a 16 times difference in 2007.

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In terms of income, the highest earners took home a median of about $282,000, while the lowest income group earned about $19,100. The research focused on households ages 51 to 64.

Many of the disparities come down to race and income, according to the report.                       

White households were more likely to have retirement account balances, with 63%, compared with all other races, with just 41%. White households also consistently had significantly higher median balances from 2007 to 2019.

Unsurprisingly, higher earnings were associated with higher rates of retirement savings. High-income households contributed about 8% of their pay — or a median of about $10,000 — while low-income households put in about 5% — or about $1,500. Employer contributions were also greater for high-income versus low-income households — with a median of $5,000 versus $1,300.

Other features of the system also contribute to the disparity. High-income households are much more likely to have access to a retirement savings plan at work.

What’s more, they are also more likely to benefit from tax perks associated with retirement plans, the GAO research found. Low-income households are more likely to make early withdrawals, and therefore pay additional taxes, compared with high-income households.

Some Washington lawmakers have bristled at wealthy investors’ use of Roth individual retirement accounts to avoid paying taxes.

“At a time when half of older Americans have no retirement savings at all, it is unacceptable that taxpayers are forced to spend billions of dollars subsidizing the retirement accounts of the wealthiest people in America,” Sen. Bernie Sanders, I-Vt., said in a statement in response to the GAO report.

7 reasons for nest egg disparities

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Certain other factors may contribute to the retirement savings disparity, according to the research.

  1. Job tenure: A head of household spending 10 years’ additional tenure at their longest job is associated with a 37% larger retirement account balance. The tie between job tenure and account balances is twice as strong for middle-income households as for high-income households, the research found.
  2. College education: Heads of household with at least some college education had 63% larger retirement account balances compared with heads of households who never attended college.
  3. Children: Households with two children had balances that were about 40% lower compared with similar households without children.
  4. Asset allocation: High-income households have greater investments in stocks, which leads to larger long-term balance growth. High-income households had a 2.5 times higher median percentage of their retirement accounts invested in stocks versus low-income households.
  5. Withdrawals: More than twice the share of low-income households versus high-income households withdrew all their money from their retirement accounts when they left an employer between 2016 and 2018, according to the research. While those workers tend to cash out to cover costs associated with mortgage payments, health insurance or poor health, those withdrawals tend to reduce assets and therefore limit long-term account growth.
  6. Divorce: Low-income households are more often divorced, widowed or separated — statuses that are frequently associated with lower retirement account balances, according to the research.
  7. Unemployment: Low-income households tend to experience unemployment more frequently, which leads to lower retirement balances. However, even high-income households tend to have declining retirement account balances during periods of unemployment, the research notes.

‘Baby steps’ can build wealth but reform may do more

Low-income earners can take “baby steps to build some retirement wealth,” said Teresa Ghilarducci, a labor economist and professor of economics at The New School for Social Research.

“Never borrow or liquidate from an IRA or 401(k); save the maximum in an employer plan, if you are among the lucky few with one; open your own IRA with low fees and a 70 stock/30 bond portfolio,” she said.

Yet the biggest changes to put retirement savers on equal footing must come from policy changes, she said.

“We will never have significant closure of the retirement wealth gap without bold reform for much higher Social Security benefits at the bottom and universal workplace savings plans,” Ghilarducci said.  

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