This feeling has implications for workers’ ability to generate meaningful income in retirement.  Only 21 percent of workers are very confident they will have enough money to live comfortably in retirement, according to the Employee Benefit Research Institute’s 2024 Retirement Confidence Survey. Why is retirement confidence so low while the S&P 500^® reaches historic heights? Because Americans’ retirement readiness is less connected to the stock market and has more to do with their financial well-being.

From a three-legged stool to a high-wire act

Just 40 years ago, retirement in America looked much different than it does today. Before the shift in the 1980s from defined benefit (DB) pension plans to defined contribution (DC) retirement plans, such as 401(k), 403(b) and 457 plans, the U.S. retirement system truly was a “three-legged stool.” Retired workers received post-employment income through a balance of the three legs: Social Security, employer-funded pensions and personal savings. Since the introduction of DC retirement plans and subsequent decline of DB pension plans, the balance of the “three-legged stool” has steadily become more precarious.

In 2023, only 15 percent of private sector workers are pension plan participants, according to the U.S. Bureau of Labor Statistics. Now that retirement in the private sector is dominated by DC plans, the majority of retirement savings come from individuals’ own saving. Vanguard’s study How America Saves 2024 found employer contributions were less than 40 percent of 401(k) savings in 2023. In addition, in DC plans the market risk is borne by individuals, while plan sponsors bear the market risk in DB plans. To summarize, many workers’ pensions have been replaced with DC retirement accounts that are mostly funded by their own savings and subject to significant risks. To address this situation, the National Institute on Retirement Security published “Policy Ideas for Boosting Defined Benefit Pensions in the Private Sector.”

It's not just the pension leg of the stool that’s been cut short; the stability of Social Security’s leg is in serious doubt. According to the Social Security Administration’s 2024 Trustees Report, the Social Security reserves will not be sufficient to cover full benefits by 2035. There is some time for legislative action to address Social Security’s solvency issues, but Americans aren’t counting on it; 68 percent of workers are concerned that Social Security will run out in their lifetime, Bank of America reported in its 2024 Workplace Benefits Report.

Today, Americans feel less like their retirement is secured by a three-legged stool and more like they’re balancing in a high-wire act. For many workers, the reality is that income in retirement is almost entirely dependent on their ability to save adequately and consistently across their career. This is the reason that financial well-being has become so important to achieving meaningful retirement income.

The four levels of financial well-being

For individuals to successfully transition from receiving a paycheck from their employer to generating income in retirement, they need to strive for a state of financial well-being throughout their careers. How financial well-being shapes a worker’s retirement income is best described through the U.S. Consumer Financial Protection Bureau’s definition of financial well-being. Individuals achieve maximum financial well-being if they are in a state where they are financially stable, resilient, in control and have choice.

This definition is hierarchical, and each level needs to be conquered before subsequent elements of well-being can be tackled.

The first level of financial well-being is stability

Individuals need to have the stability to cover daily and monthly expenses. Before workers are mentally (or financially) able to focus on retirement and other long-term financial goals, they need to feel secure in the short term and have a handle on all of life’s expenses (e.g., housing, groceries, transportation, debt payments, insurance premiums and dependent care).

The second level of financial well-being is resiliency

Individuals need to have the resiliency to absorb financial shocks. If workers are living paycheck to paycheck, then unexpected expenses, such as a surprise car or refrigerator repair bill, can derail their financial trajectory. Without a financial buffer, these unexpected expenses can only be paid by sacrificing future assets through credit card debt, high-cost, short-term loans or DC retirement plan loans.

The impact of taking money out of a retirement account should not be underestimated, especially early in a worker’s career. According to the Forbes article, “401(k) Early Withdrawal: Pros & Cons of Tapping Your Retirement Accounts,” withdrawing $10,000 from an account at age 35 could result in $263,000 less in retirement savings at age 65.

The third level of financial well-being is control

Individuals need to have the control to save for their financial goals. This level directly addresses retirement savings, but workers need to be both financially stable and resilient in order to exercise this control and make incremental progress toward long-term financial goals.

Reaching and maintaining this level of financial well-being is a significant challenge for American workers. Many workers live paycheck to paycheck, and even those with some savings have only paper-thin buffers. A survey by Bankrate found just 44 percent of U.S. adults have enough cash to cover a $1,000 emergency bill. This is especially troubling in a DC retirement system because individuals can only achieve meaningful retirement income by saving consistently throughout their career.

The fourth and final level of financial well-being is choice

To be financially well, individuals need to have the financial freedom to make the choices that allow them to enjoy life. This includes the ability to retire in a timely fashion. Workers who continue to work past their desired retirement age due to a lack of retirement income have not reached the pinnacle of financial well-being.

Retirement confidence is a product of high financial well-being

It is not a product of a surging stock market. While the S&P 500^® hit a new all-time high in mid-September, retirement confidence still has not recovered because people’s financial well-being has not recovered.

Inflation may have cooled, but prices haven’t gone down, and three-quarters of workers are concerned the cost of living will outpace income growth, as Bank of America reported in the above-mentioned study.

In some ways, the social contract between organizations and their people has changed; DB pension plans are less and less accessible to workers who are expected to take their retirement into their own hands. However, workers still expect a benefits package that empowers them to achieve meaningful retirement income. Financial well-being is the connective tissue that has emerged to bridge the gaps left by the transition from a DB to a DC retirement system.

The plan sponsor's role

For retirement plan sponsors to fulfill their part of their social contract with participants, plan sponsors need to offer retirement benefits that are understandable and provide meaningful and stable income in retirement.

If any of these criteria are not being met, it may mean that the design of the plan is not aligned with participants’ needs, but it may also mean that the connective tissue of financial well-being is missing.

It’s difficult to figure out how your people’s financial well-being is impacting your organization. Discover your organization’s financial well-being score by taking Segal’s five-minute self-assessment.