Trouble saving for an income shock? So do 96 percent of working Americans

People at all income levels are guilty of not saving enough for retirement, but it may not be entirely their fault.

Income shocks — defined as an annual earnings drop of more than 10 percent — are so common that 96 percent of working Americans experience four or more of them by the time they reach age 70, according to research by the nonprofit National Endowment for Financial Education in Denver.

"You can do everything right, but life is going to happen," said Bill Hensley, senior director of education at the endowment. "You may lose your job or you might have to take time off from work to care for a loved one. Things will happen that are beyond your control."

The National Endowment for Financial Education study, conducted by Teresa Ghilarducci and Anthony Webb, found that almost no one is safe from periods of lost income due to a health crisis, job loss or other life transitions during their working years.

The researchers linked data from the Survey of Income and Program Participation — a statistical survey conducted by the U.S. Census Bureau — with individual earnings records from the Social Security Administration and the Internal Revenue Service. The data provide an opportunity to investigate individual differences in retirement savings while controlling for differences in employment and earnings history, marital status, health status and disability history.

Ghilarducci and Webb looked at data from 2008 to 2012 with a weighted sample size of 15.7 million people. They found only a third of the people in the sample size were able to participate in a workplace retirement plan, which they argue could be a contributor to so many people not having enough money saved for retirement.

Research often looks for a single factor — such as medical expenses — to explain why individuals aren't saving enough.

But this report takes into account that income shocks such as unemployment, divorce and other earnings changes often cluster together; and the impacts vary in magnitude depending on the person's gender, race and socioeconomic status.

The study made no recommendations regarding how much savings an individual should have at retirement age.

Compared to their white peers, nonwhite workers have a greater risk of not having enough retirement savings.

Black workers end up with $16,977 less than their white peers; Asian workers fall short between $11,743 and $41,979; and Latino nonwhite workers have between $8,280 and $24,278 less than white workers at retirement.

Experts say consumers shouldn't automatically drop life insurance policies after the kids are gone.

Among top income earners, the racial impact is more significant. Nonwhite workers end up with a deficit ranging from $19,000 to $54,000 compared to white workers, the study found. The study did not offer any rationale to explain the differences.

Because the impact of life events depend heavily on the cushion one has in wealth and income, the sample also was divided into three income groups.

The top 10 percent of people who were surveyed include workers earning $80,000 or more. They were more likely to be white and educated; more likely to work full-time for a large company; and 45 percent of the top 10 percent had a defined contribution retirement plan.

The middle 40 percent earning between $26,532 and $80,000 had three times the assets of the bottom group and 36 percent of them had a defined contribution retirement plan.

Only 7 percent of the bottom 50 percent — those earning $26,531 or less — have defined contribution retirement plans. The middle and bottom groups also are more likely to be disabled, divorced, widowed, separated, have fewer children and received government assistance.

"It shows the need for better understanding for financial education, financial literacy and saving while you have the opportunity to save, to offset the bumps in the road when things come up that prohibit saving," Hensley said.

The most negative impacts in a person's working years come from declines in health, including long-term illness and a work-limiting disability.

When a low- or middle-income worker cannot work, or when income decreases significantly for any reason, often they withdraw money from retirement savings accounts — incurring large penalties — or they stop contributing to their retirement savings entirely. And that will hurt later.

The National Endowment for Financial Education research shows that it's not a matter of if some life event will disrupt a worker's earnings, but when and how severe the effect of the income shock will be.

"Knowing it's going to happen to 96 percent of us, I would recommend people save — and save early — because there will be a time saving for retirement will be more difficult, if not impossible," Hensley said.

Tim Grant writes for the Pittsburgh Post-Gazette.