Board of Governors of the Federal Reserve System

Retirement

Most retirees reported their financial situation at the time of the survey was similar to 12 months earlier. However, a sizable share of recent retirees said COVID-related factors affected the timing of their retirement decision. Differences in retirement preparedness among non-retirees also remained largely the same. Non-retirees who experienced a layoff were less likely to have retirement savings but more likely to have borrowed from, or cashed out, these accounts in the prior year.

Current Retirees

Retirees represent a sizeable portion of the adult population. Twenty-seven percent of adults in 2020 considered themselves to be retired, even though some were still working in some capacity.⁴⁸ Thirteen percent of retirees had done some work for pay or profit in the prior month. Consequently, 4 percent of all adults considered themselves retired and were still working. Retirees with more education were more likely to work in retirement.

In deciding when to retire, most retirees indicated that their preferences played a role, but life events contributed to the timing of retirement for a substantial share (figure 37). Forty-eight percent of retirees said a desire to do other things or to spend time with family was important for their decision to retire, and 45 percent said they retired because they reached a normal retirement age. Nonetheless, 29 percent said that a health problem was a factor in their decision to retire, and 15 percent said they retired to care for family members. Just over 1 in 10 said they were forced to retire or that work was not available. Collectively, health problems, caring for family, and lack of work contributed to the timing of retirement for 45 percent of retirees.

A sizeable share of recent retirees indicated that COVID-19 was a factor in their retirement decision. Twenty-nine percent of adults who retired in the past year said factors related to COVID-19 contributed to when they retired. Compared to other retirees, recent retirees whose retirement decision was related to COVID-19 were more likely to say they retired because they were forced to do so or work was not available, because they did not like their work, or to care for family members. They were less likely to say they retired because they reached a normal retirement age. Reasons for retirement can have longer-run implications. Economic well-being among retirees can vary considerably by whether the reasons for retirement appeared to be voluntary and determined by preferences or were unanticipated and driven by life events.⁴⁹

Social Security was the most common source of income in retirement in 2020, but 81 percent of retirees had one or more sources of private income.⁵⁰ This included 59 percent of retirees with income from a pension; 46 percent with interest, dividends, or rental income; and 32 percent with labor income (table 22).⁵¹ Seventy-nine percent of retirees received income from Social Security in the prior 12 months, including 93 percent of retirees age 65 or older.

Table 22. Sources of income in the prior 12 months among retirees (by age)

Looking back over the year, most retirees reported their financial situation at the time of the survey was similar to 12 months earlier, and they were more likely to report being in a similar financial situation than were non-retirees (figure 38). Sixty-one percent of retirees said they (and their family) were in about the same financial position as they were 12 months earlier, compared with 47 percent of non-retirees. Relatedly, almost three-fourths of retirees had total monthly income that was about the same as 12 months prior, and two-thirds had total monthly spending that was about the same.

Retirement Savings among Non-Retirees

Although three-fourths of non-retired adults had at least some retirement savings, about one-fourth did not have any (figure 39). This share was nearly unchanged since 2019. Among those with retirement savings, these savings were most frequently in defined contribution plans, such as a 401(k) or 403(b), with 54 percent of non-retired adults having money in such a plan. These accounts were more than twice as common as traditional defined benefit plans such as pensions, which 21 percent of non-retirees held. Forty-eight percent of non-retirees had retirement savings outside of formal retirement accounts.

While most non-retired adults had some type of retirement savings, only 36 percent of non-retirees thought their retirement saving was on track. Because retirement saving strategies differ by circumstances and age, survey respondents assessed whether or not they felt that they are on track, but they defined that for themselves. Thirty-six percent of non-retired adults thought their retirement saving was on track, while 45 percent said it was not and the rest were not sure.

Retirement savings and perceived preparedness differed across demographic groups. Younger adults were both less likely to have retirement savings and to view their savings as on track than older adults. Compared to all non-retirees, Black and Hispanic non-retirees were less likely to have retirement savings and to view their retirement savings as on track, while White and Asian non-retirees were more likely to have such savings and say they were on track (table 23).

Table 23. Retirement saving and self-assessed preparedness (by age and race/ethnicity)

The lower rates of savings among Black and Hispanic non-retirees partly reflects the fact that Black and Hispanic adults are, on average, younger than the non-retired population overall. Even within age cohorts, however, significant differences remained in retirement savings by race and ethnicity, consistent with patterns seen in previous years.

Occasionally, retirement savings can also act as a source of emergency funds for non-retirees who face economic hardships. Provisions in the CARES Act supported this by allowing favorable tax treatment of COVID-related distributions from retirement accounts.⁵² However, many non-retirees who experienced layoffs did not have self-directed retirement savings (figure 40). Forty-two percent of non-retirees who experienced a layoff in the past year did not have self-directed retirement savings at the time of the survey, compared to 26 percent of non-retirees who did not experience a layoff.⁵³ Hence, the concentration of employment losses among workers who were less likely to have self-directed retirement savings limited the number of laid off workers who could tap retirement accounts in response to these policy changes.

Despite being less likely to have retirement savings, non-retirees experiencing a layoff were more likely to have borrowed from or cashed out retirement accounts. Overall, 9 percent of non-retired adults tapped their retirement savings—a slight uptick from 2019. Yet, a higher 14 percent of non-retired adults who had experienced a layoff borrowed or cashed out funds from their retirement savings.

Non-retirees with smaller account balances were also more likely to have borrowed from, or cashed out, funds from their retirement accounts in the past year (figure 41). Fifteen percent of those with account balances under $50,000 borrowed from, or cashed out, these accounts, compared with 9 percent of those with account values of $50,000 or more. While tapping retirement funds could result in smaller account balances, adults with lower income (and likely with lower account balances) were more likely to experience shocks that could prompt them to tap retirement reserves early.⁵⁴

Comfort Managing Savings and Financial Literacy

Self-directed retirement accounts frequently have complex rules on withdrawals and rely on individuals to have the skills and knowledge required to manage their own investments. Non-retirees with self-directed retirement savings varied in their comfort with making investment decisions for their accounts. More than 6 in 10 non-retirees with self-directed retirement savings expressed low levels of comfort in making investment decisions with their accounts.

Among those non-retirees with self-directed savings, a minority of women of all education levels, and men with less education, were comfortable managing their retirement investments (figure 42). While 60 percent of men with at least a bachelor's degree were mostly or very comfortable making investment decisions, 36 percent of men with a high school degree or less expressed that level of comfort. Women with any level of education were less comfortable making investment decisions than men. Thirty-one percent of women with at least a bachelor's degree were comfortable managing their investments, and the share was somewhat lower for women with less education.

To also get some sense of individuals' financial knowledge, respondents were asked three questions—on interest, inflation, and risk diversification, respectively—that are commonly used as measures of financial literacy (figure 43):⁵⁵

1. Interest: Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow? (Correct answer: More than $102)
2. Inflation: Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After one year, how much would you be able to buy with the money in this account? (Correct answer: Less than today)
3. Diversification: Do you think the following statement is true or false? "Buying a single company's stock usually provides a safer return than a stock mutual fund." (Correct answer: False)

Higher shares of adults provided correct answers to questions about interest and inflation than to the question on risk diversification. The average number of correct answers was 1.8 out of 3, and 33 percent of adults got all three correct.

Self-assessed comfort in managing investments was correlated with these measures of financial literacy. Among those with self-directed retirement accounts, those who expressed comfort with managing their investments answered a larger share of questions (75 percent) correctly, on average, than those who expressed little or no comfort (60 percent) (table 24). Notably, the share of incorrect answers did not vary much with investment comfort. Instead, the number of "don't know" responses fell as investment comfort rose. Overall, however, non-retirees with such accounts still answered more financial literacy questions correctly, on average, than either non-retirees who did not have such accounts or people who were already retired.

Table 24. Financial literacy (by retirement savings and comfort investing)

Gender differences in financial literacy mirrored differences in being comfortable with the investment decisions. Women, on average, answered a lower share of financial literacy questions correctly (52 percent) than men (65 percent). Women were also more likely to select "don't know" or to skip the question (39 percent) than men (27 percent). As a result, women, on average, had lower levels of financial literacy by this measure. Some evidence suggests that one driver of this gender difference may relate to different levels of experience with financial decisions.⁵⁶

 

References

 

 48. In this report, descriptions of current retirees include everyone who reported being retired, including those who also reported that they are working. Return to text

 49. See box 4 of the Report on the Economic Well-Being of U.S. Households in 2019, Featuring Supplemental Data from April 2020. Return to text

 50. In addition to the income sources discussed here, most retirees also qualified for Economic Impact Payments authorized by the CARES Act and some qualified for other benefits. Return to text

 51. The type of pension was not specified, so pension income may include income from defined benefit plans, which pay a fixed monthly amount and defined contribution plans, such as 401(k) and 403(b) plans. Return to text

 52. "Coronavirus-Related Relief for Retirement Plans and IRAs Questions and Answers," Internal Revenue Service, last updated September 19, 2020, https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers. Return to text

 53. Some people who were laid off may have cashed out all of their retirement savings. Among the 2020 SHED respondents who also took the 2019 survey, 40 percent of those who were not retired in either year who experienced a layoff in 2020 did not have self-directed retirement savings in 2020. This is up from 36 percent of the same group who did not have self-directed retirement savings at the time of the 2019 survey. In contrast, among the group of non-retirees who took both surveys but did not experience a layoff, the share who had no self-directed retirement savings was similar year over year (23 percent in 2020 and 24 percent in 2019). Return to text

 54. For more on early withdrawals and the relationship with economic shocks and income, see Robert Argento, Victoria L. Bryant, and John Sabelhaus, "Early Withdrawals from Retirement Accounts during the Great Recession," Contemporary Economic Policy 33, no. 1 (March 2013), https://www.researchgate.net/publication/254969212_Early_Withdrawals_from_Retirement_Accounts_during_the_Great_Recession. Return to text

 55. These questions were developed by Annamaria Lusardi and Olivia Mitchell (see "Financial Literacy around the World: An Overview," Journal of Pension Economics and Finance 10, no. 4 (2011): 497–508) and have been widely used to study financial literacy. In the 2020 SHED, half of the respondents received the questions and answer choices developed by Lusardi and Mitchell, and the results reported here reflect their responses. The other half of the respondents received the same questions without the "Don't know" answer option. Results from the group who received this alternative formulation are included in appendix B of the appendixes to this report. Return to text

 56. Some of the gender gap in financial literacy may relate to specialization in financial tasks within a household, with women being less likely to handle the finances. Joanne Hsu finds that women's financial literacy increases after the death of a spouse (see "Aging and Strategic Learning: The Impact of Spousal Incentives on Financial Literacy," Journal of Human Resources 51, no. 4 (Fall 2016): 1036–67). Return to text