401k Saving Harder at Lower Incomes

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Sales assistant working in a supermarketOur 401(k) retirement system doesn’t work as well for lower- and middle-income workers as it does for those at the top.

That’s because they face more severe headwinds in pursuit of their retirement goals, concludes a new study.

Consider what happens when a worker’s earnings drop 10 percent or he experiences a bout of unemployment. These episodes are more common among lower-paid workers, and when they hit, they hit their 401(k)s harder than the 401(k)s of people who earn more, according to the study, “Defined Contribution Wealth Inequality.”

In theory, 401(k)s could work for everyone – if everyone had access to an employer savings plan (which they don’t).  And while people who earn more money obviously have more to sock away in their retirement plans at work, smaller paychecks aren’t necessarily a problem either.

The key to retirement for any worker is whether he or she has saved enough, along with Social Security, to cover about 75 percent of what they earned at work during the years leading up to their retirement. It’s true that lower-paid workers can’t save as much, but less could still be enough to reach their more modest retirement goals.

But earnings declines, unemployment, smaller employer contributions, and unwise investment choices – these “barely affect earners in the top 10 percent of the earnings distribution but are associated with less DC [defined contribution] wealth accumulation for those at the bottom,” concluded the researchers, Joelle Saad-Lessler at the Stevens Institute of Technology and Teresa Ghilarducci and Gayle Reznik at the New School for Social Research.

This disparity, they argue, has increased the retirement wealth gap in this country.  In the post-recession period 2009-2011, for example, more high-income workers saw their DC account balances increase than did workers in the bottom half.

The researchers tracked the same people over time in two groups – the bottom 55 percent of the earnings ladder and the top 10 percent. They were able to more precisely compare each group’s ability to save for retirement by using the actual earnings and employer contributions to individual workers’ retirement plans. Here are their other findings:

  • High-income workers were able to save 6.11 percent of their pay in their retirement plans, compared with just 2.8 percent for workers on the bottom half of the earnings ladder. Presumably this is because lower-paid workers devote a larger share of their paychecks to basics like housing and healthcare.
  • Lower-paid workers experienced significant drops in their earnings five times over their careers for reasons ranging from poor health to divorce. This reduced their retirement account balances, while high-income workers with more financial resources to fall back on were largely unaffected by major earnings shocks.
  • Workers in the lower half of earnings also spent more time out of work between 2009 and 2011. Their retirement saving took a hit during their idle spells, while high-income workers’ saving did not.
  • One bright spot in the study is that increases in employer contributions gave a much bigger boost to lower-paid workers’ savings. The downside is that the ability of lower-paid workers to save is more dependent on employer contributions than it is for well-paid workers.

Past research has shown that 401(k) coverage in this country is spotty.  Only 12 percent of low-income older Americans have access to a 401(k).

This study highlights another aspect of the retirement problem.

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Thank you for sharing these findings. From my experience, women are the most affected because most women work in low-skill and low-paid professions. They also take time off to care for loved ones which of course affects their ability to save sufficiently for retirement. This is a real market failure that needs to be addressed through government intervention.


I didn’t find much startling information in this article, it appears to be common sense. Also affecting your ability to save for retirement is the number of children you have, a bout with a serious medical issue, having to financially assist a parent or sibling that is in need, or just the fact that your vocational choice may be in a field that is ‘not appreciated’ (meaning less remuneration) but still highly relevant in developed countries.

Michael Waggoner

Was the study able to consider borrowing from 401(k)s? Perhaps the economic stress of wage cuts and layoffs that reduce contributions also could lead to borrowing and thus premature depletion of the 401(k)s.

Andrew George Biggs

The blog post reads:

“High-income workers were able to save 6.11 percent of their pay in their retirement plans, compared with just 2.8 percent for workers on the bottom half of the earnings ladder. Presumably this is because lower-paid workers devote a larger share of their paychecks to basics like housing and healthcare.”

But a huge factor is that high-income workers receive MUCH lower replacement rates from Social Security, which means that to maintain their pre-retirement standard of living they have to save much more on their own.

    Marina Kingston

    Or to have an additional PASSIVE income 😉

Kim Blanton

Thanks for the thoughtful comments!
Andrew-unfortunately, the study didn’t look at the Social Security side of the issue either. But that’s a really important point that I could’ve raised.

Kim (blogger)


Even people who may face future periods of unemployment should at least contribute enough to take full advantage of an employer 401k match. This “free money” should more than make up for the potential of a 10% penalty in case of financial hardship.


Even low income employees should take advantage of their 401k’s.

Especially if you’re young because the money accumulated (rather small or large contributions) won’t be the same when you reach your 40’s — you just can’t go back in time when it comes to compounded interest.

Plus, most companies match dollar for dollar (up to 6%) of what you contribute to your 401k. Don’t pass up free money even if your contributions are small.

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