If I asked you from what sources you thought your retirement income would come from, what would you say? Most people say Social Security, a pension (if they have one, as I mentioned in my last blog post, many companies are doing away with traditional pension plans due to the costs associated with maintaining the pension plan), and/or personal retirement savings. This would be a correct answer for many Americans. In fact, if you notice closely, those three items are all included in the infamous 3-legged stool for retirement income that many financial planners have used for years to describe the sources of retirement income. But something interesting has occurred recently as many retirees are finding that two of the three legs in their retirement stool are inadequate to cover their living expenses.
For many Americans, the personal savings and pension pieces of their retirement picture are not producing the level of income they need them to produce (in a future blog post I will discuss how much someone should realistically expect to withdrawal from their retirement accounts each year while trying to make the account last throughout their retirement). In 2013, AARP’s Public Policy Institute released the research they completed in 2012 regarding the issue of income for older Americans. Some of their findings were expected; for instance, Social Security is still the largest income source for retirees, however, some of the research findings were a little more surprising and continue a trend that started in the late 1990s.
According to AARP’s findings, the average income replacement percentages for those 65 and older here in the U.S. were: Social Security – 38% (although they found the number was closer to 80% for low to moderate income retirees), Pensions and Retirement Savings – 19% (this number has been trending down since the late 1990s), Income from assets – 11%, and Government Transfers – 2%. So far these four sources have accounted for 70% of the income sources for those over age 65 on average – so where do you think the other 30% of income would come from? You probably guessed it-Employment Income accounts for the final 30%. I know what you must be thinking: I thought those age 65 and older would be “retired”. As I mentioned in one of my previous blog posts, what does it take to retire – age or money? Here is a real-world example of how it truly does take money to be able to retire in the sense that most people view retirement.
I believe this trend we are seeing, where those of retirement age must continue to work to provide for their income needs, will continue. By the way, did you know the average Social Security benefit is approximately $1,300 per month (the link shows the average Social Security benefit for 2013, I could not find data on 2014 numbers, but it would be close). In perspective, the average new car payment in 2014 was $471, while the average used car payment was a little lower but still came in at $352. I hope you can see now why Social Security alone will not be enough to live on, you will need some additional retirement income sources.