Skip to main content
UK - Financial Adviser
Select Region Select User Type
  • Global
    • Home
  • UK Investors
    • Financial Adviser
    • Private Investor
  • International Investors
    • Private Investor
    • Professional Investor
  • Fund Centre
    • Our Funds
      • Equities
        • Rathbone Global Opportunities Fund
        • Rathbone Greenbank Global Sustainability Fund
        • Rathbone Income Fund Fund
        • Rathbone UK Opportunities Fund
      • Fixed Income
        • Rathbone Ethical bond Fund
        • Rathbone High Quality Bond Fund
        • Rathbone Strategic Bond Fund
        • Rathbone Greenbank Global Sustainable Bond Fund
      • Multi-Asset
        • Rathbone Greenbank Multi-Asset Portfolios
        • Rathbone MULTI-ASSET PORTFOLIOS
      • Sustainable
        • Rathbone Greenbank Global Sustainable Bond Fund
        • Rathbone Greenbank Global Sustainability Fund
        • Rathbone Greenbank Multi-Asset Portfolios
    • Literature Library
    • Consumer Duty
    • Prices and Performance
    • Glossary of Terms and FAQs
  • Strategies
    • Equities
    • Fixed Income
    • Multi-Asset
    • Sustainable
  • Our Clients
    • Private Investor
    • Financial Adviser
    • International Private Investor
    • International Financial Adviser
  • Rathbones
  • Global Home
  • Insights
    • Fund Insights
    • In the know blog
    • Review of the week
    • The Sharpe End podcast
  • About us
    • About us
    • Our People
    • Awards
    • Media centre
    • Responsible Investing at Rathbones
  • Contact
Home Home

Search

  • Fund Centre
    • Our Funds
      • Equities
        • Rathbone Global Opportunities Fund
        • Rathbone Greenbank Global Sustainability Fund
        • Rathbone Income Fund Fund
        • Rathbone UK Opportunities Fund
      • Fixed Income
        • Rathbone Ethical bond Fund
        • Rathbone High Quality Bond Fund
        • Rathbone Strategic Bond Fund
        • Rathbone Greenbank Global Sustainable Bond Fund
      • Multi-Asset
        • Rathbone Greenbank Multi-Asset Portfolios
        • Rathbone MULTI-ASSET PORTFOLIOS
      • Sustainable
        • Rathbone Greenbank Global Sustainable Bond Fund
        • Rathbone Greenbank Global Sustainability Fund
        • Rathbone Greenbank Multi-Asset Portfolios
    • Literature Library
    • Consumer Duty
    • Prices and Performance
    • Glossary of Terms and FAQs
  • Strategies
    • Equities
    • Fixed Income
    • Multi-Asset
    • Sustainable
  • Our Clients
    • Private Investor
    • Financial Adviser
    • International Private Investor
    • International Financial Adviser
  • Rathbones
  • Global Home
  • Insights
    • Fund Insights
    • In the know blog
    • Review of the week
    • The Sharpe End podcast
  • About us
    • About us
    • Our People
    • Awards
    • Media centre
    • Responsible Investing at Rathbones
  • Contact
Home

Search

The savings shortfall

<p>Numerous studies have predicted a large retirement ‘savings gap’ — the shortfall in current or projected pension provisioning from a benchmark level of retirement income. The figure of 70% of pre-retirement income has become the heuristic benchmark, often termed a 70% ‘replacement rate’. Though sometimes criticised for arbitrariness, it is actually supported by the economic and social science literature since the 1960s (Modigliani 1966).</p>
5 December 2018

Breadcrumb

  1. Home
  2. Knowledge and Insight
  3. The savings shortfall

Article last updated 19 February 2023.

Numerous studies have predicted a large retirement ‘savings gap’ — the shortfall in current or projected pension provisioning from a benchmark level of retirement income. The figure of 70% of pre-retirement income has become the heuristic benchmark, often termed a 70% ‘replacement rate’. Though sometimes criticised for arbitrariness, it is actually supported by the economic and social science literature since the 1960s (Modigliani 1966).

Of course, the definition of pre-retirement income is also contentious (such as the lifetime average or the average in the 10 years before retirement). And some experts prefer a range of replacement rates. The UK Pensions Commission, for example, uses an 80% threshold for those earning the least during their working lives, falling to 50% for the highest earning quintile. 

The choice of benchmark can result in significant differences. Add in other variables and the permutations are innumerable. But no matter what assumptions are made, researchers always find a gap — both in the UK and across advanced economies as a whole. In other words, saving needs to increase, pensioner spending decrease, or working lives lengthen.

Work more, save more, buy less stuff

As our Millennial Matters publications are concerned primarily with younger generations and the impact they are having, research from the International Longevity Centre (ILC) provides the most pertinent delineation of the savings gap. Their researchers calculate the annual savings that someone needs to make in order to generate a 70% replacement rate if they entered the workforce today at the average age of entry. Across advanced economies, if today’s savings habits continue, there is a shortfall equivalent to 5% of pre-retirement earnings. In other words, workers need to save an additional $2,015 a year. In the UK, the gap is a little lower at 4% (Franklin & Hochlaf 2017). 

Having a saving pattern that falls short of benchmarks is not an especially millennial affliction. Generation X is also way off track. Indeed, in the UK, they are likely to be worse off than millennials because many have gone without the defined benefit pensions enjoyed by their parents, but started work well before enrolment in defined contribution schemes became automatic (Intergenerational Commission 2018). 

A report commissioned by the World Economic Forum (WEF) focused on all current workers, not just new entrants, in eight major economies. They found that savings fall short of a 70% replacement rate by a total of $67 trillion, or 150% of combined GDP. That’s 6% of GDP per year during the time the median worker has left to retirement (Berenberg 2018). Clearly this isn’t just a millennial matter. 

The ‘intergenerational savings gap’, which is the additional savings that a new worker would need to make to match incomes of current pensioners, is even bigger: 12.6% of earnings, or $5,080 a year. Again the UK is lower, at 6%, or around $3,000. European countries fare worst on this basis, due to reforms that have reduced the generosity of state pensions. 

To put it another way, the average new worker in the UK, the US, Canada or Germany needs to save, in total, between 10% and 20% of their income to meet a 70% replacement rate, and between 15% and 25% of their income to match the retirement incomes of previous generations (figure 1, Franklin & Hochlaf 2017). Today, the average savings rate across these economies is much lower at 4.5% (although the underlying data include non-working-age households too). According to a YouGov study, 30% of people aged 45 to 54 — in what should be their prime years of saving — save none of their disposable income (CEBR 2016).

The WEF projects that the savings gap in the eight major economies it studied will widen to over $400 trillion by 2050, from their current estimate of $67 trillion. In other words, saving will need to increase by 5%, or $9.4 trillion a year, just for the funding shortfall to stay where it is today. In the UK, $940 billion of extra saving is required to close the gap (WEF 2017). That’s 2.7 times current gross national saving every year for 35 years. Saving needs to start now.

Numerous studies that focus on just one country or just one source of retirement income reach similar conclusions: there’s a funding shortfall that’s likely to keep growing (cf. VanDerhei 2015; Munnell and Hou 2018).

We see three paths from here:

  • work more: people retire later, the corollary of which may also be an increase in aggregate saving (see below).
  • save more: saving increases today and consumption decreases.
  • consume less: saving does not increase today, but consumption decreases tomorrow as workers start to retire on inadequate incomes.

The WEF report sums it up best: ‘Given the current long-term, low-growth environment, it is unrealistic to expect that saving ~5% of a paycheck each year of your working life will provide a comparable income in retirement.’ 

Figure 1: Intergenerational gap

How much an individual would need to save (% of income) to achieve the retirement income of previous generations. 

Source: Datastream and Rathbones.

Don’t blame the young

Let’s get one thing straight: millennials are not frittering away their future pensions on heirloom avocados and turmeric lattes. In the UK, people aged 25 to 34 spend less relative to 55- to 64-year-olds than at any time since at least the 1960s. Adjusting for inflation, their consumption after housing costs is barely any higher today than it was in the late 1990s. This pattern reverses the increasing consumption of younger adults in the 1960s, 1970s and 1980s. In other words, it was the baby boomers who ate more prawn cocktails and drank more cappuccinos, extending consumption patterns both in their youth and in their golden years (Intergenerational Commission 2018). 

It may be that stereotyping has mistaken consuming more conspicuously for consuming more. There is survey evidence that millennials place more importance on having lots of money and expensive things than older generations (Ipsos Mori 2017). However, millennial avarice is not the reason why they may struggle to retire as comfortably as their parents.

Simply, millennials are paying more for the roofs over their heads, with pay packets that aren’t increasing by as much as previous generations’. In the UK, millennials at age 30 are earning less than Generation X did at the same age, in inflation adjusted terms. They are also less likely to be employed on the basis of a secure, full-time contract. Younger millennials are faring worse than older millennials. 

The stagnation in real pay since the financial crisis, the longest in 150 years, is making it harder for millennials to start saving more. 

Millennials are far from alone in their under-preparation. Generation X may be the most poorly positioned. Broader still, almost a third of US households were at risk of retiring with inadequate income in the 1980s. Today it’s 50% (Center for Retirement Research).

Popular Articles

ethical bond fund field
30 April 2025

Ethical Bond Webcast | April 2025

After a period of volatility in risk markets, Bryn will give his views on the outlook for rates and credit markets and will go into how the Washington whack-a-mole politics are creating very short-term volatility.

Find out more

1 min

Income Fund
4 June 2025

Income Fund | June 2025

Join Alan Dobbie and Carl Stick, managers of the Rathbone Income Fund, as they share how their disciplined approach has delivered first-quartile, market-beating returns so far in 2025—and what they believe lies ahead for income-focused investors.

Find out more

1 min

9341_multi-asset_webinar_cm.jpg
14 May 2025

Multi-Asset Webcast | May 2025

Join David Coombs, Head of Multi-Asset Investments of the Rathbone Multi-Asset Portfolios, for his next webcast on Wednesday 14 May at 10.00 am.

Find out more

1 min

MOST READ
  1. Ethical Bond Webcast | April 2025

  2. Income Fund | June 2025

  3. Multi-Asset Webcast | May 2025

  4. Review of the week: The emperor's new tariffs

  5. Review of the week: Gloves off?

Let's Talk

Ready to start a conversation? Please complete our enquiry form, we look forward to speaking with you

Enquire
  • Important Information
    • Brexit Statement
    • Important information
    • UK Modern Slavery Act
    • Accessibility
    • Privacy
    • Cookies
    • Cookie preferences
    • Complaints
  • Important Information
    • Consumer Duty
    • Voting disclosure
    • Assessment of value reports
    • TCFD Reports
    • SDR Consumer-Facing Disclosures
    • Financial Ombudsman Service
    • Financial Services Compensation Scheme
    • Glossary of terms and FAQs
    • MIFIDPRU8
Address

Rathbones Asset Management
30 Gresham Street
London
EC2V 7QN

Rathbones Asset Management Limited is authorised and regulated by the Financial Conduct Authority and a member of the Investment Association. A member of the Rathbone Group. Registered Office 30 Gresham Street, London EC2V 7QN. Registered in England No 02376568.

© 2025 Rathbones Group Plc
Incorporated and registered in England and Wales. Registered number 01000403

Follow us
LinkedIn
City Hive Logo
ACT Logo

Rathbones Asset Management is delighted to be an early signatory of the ACT Framework created by City Hive

Diversity Project Logo

Rathbones Asset Management is a member of The Diversity Project

The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.