It’s true that not everyone is financially prepared for retirement. This year, the Employee Benefit Research Institute estimated that almost 41 percent of American households will run short of money in retirement. That’s an improvement over 2014 when nearly 43 percent of 35 to 64 year-olds were unprepared, so we’re heading in the right direction.
And here’s some even better news: Many Americans are doing better financially in retirement than they expected. (2)
Each year, T. Rowe Price surveys Americans who participate in or are eligible to participate in employer-sponsored 401(k) plans. The results have consistently confirmed retirees’ experience exceeds workers’ expectations. (2)
For instance, people who have been retired for ten or more years were asked, “Given your savings, income, and expenditures, which of the following statements are true of your retirement?” You may find the answers surprising. (2)
• 81 percent say they DO have enough money to pay for health care.
• 72 percent live as well as or better than when they were working.
• 66 percent will be able to leave money to family members or charity.
• 28 percent will be able to help out younger family members with tuition or housing.
• Only 11 percent will work at least part-time in retirement.
• And only 10 percent answered that they will run out of money.
While retirement has a different story for everyone, the survey found satisfied retirees did tend to have more income than unsatisfied retirees: (2)
• Satisfied retirees had a median household income of $90,000, versus $65,000 for unsatisfied retirees.
• The average household debt for satisfied retirees was $15,000, while unsatisfied retirees hold $24,000 in debt.
• Satisfied retirees have $370,000 in retirement accounts, while unsatisfied retirees have $281,000.
So as you can see, many middle income and higher Americans are doing just fine, far better than the grim picture we hear so much about. But those who are doing well have money saved and have income from those savings. And those who are less than satisfied with their retirement experience have less money saved and a lower income level.
You may be wondering what you can do to increase the likelihood that you’re in the satisfied group one day. Even when you have set aside significant savings and investments, transforming accumulated wealth into a steady stream of income that will support you throughout retirement can be challenging. Many strategies for generating retirement income include mixing more than one set of resources.
Social Security
Nine out of ten Americans receive Social Security benefits in retirement. Despite what we hear in the media about various political parties taking away our Social Security or that it will run out of money, it’s been here to stay since the 1930s. And while it does appear to be on shaky ground, Americans of all stripes continue to fight to keep it intact. (3,4)
For now, it’s still a viable source of retirement income and let’s hope that we can continue to rely on getting this benefit that we’ve paid into when our time comes.
However, it’s not a sure thing, and it’s important to keep in mind that it’s not likely to cover your living expenses in retirement. The average monthly benefit in June 2019 was $1,471. The maximum monthly benefit that an individual who files at age 70 can receive in 2021 is $3,895. Remember, your Social Security benefits are calculated based on your average monthly earnings during the 35-year period in which you earned the most money.
Retirement Plan Savings
A fair number of American workers have set aside savings in defined contribution plans, like 401(k), 403(b), or 457 plans. If you have money set aside in one of these plans, we encourage you to talk with an investment professional before taking any action when it’s time to retire. Taking the right steps can ensure you don’t lose tax advantages or pay too much in taxes when you take plan distributions. (3)
Pension
A less common source of retirement income these days is a pension. In the 1960s, half of the private sector workforce had a pension plan. Today, just 17 percent of Americans working in the private sector have pension plans that will provide steady income after retirement. (4)
If you have a pension, the amount of income will be determined by your tenure, earnings, and retirement age. If you’re not sure whether your employer offers a pension, talk with the Human Resources department. In some cases, you may still be eligible for a pension payout from a past employer, so be sure to check into all possibilities. (4)
Other Retirement Accounts
In addition to employer-sponsored retirement plans such as your company 401(k), many people own accounts such as traditional IRAs, Roth IRAs, and other types of retirement accounts that can provide income during retirement.
Distributions from traditional IRAs are usually taxed as ordinary income, while distributions from Roth IRAs are tax-free as long as certain conditions are met. Distributions from Roth IRAs generally will be tax-free and penalty-free, as long as the account has been owned for five or more years and the owner is age 59½ or older. (6)
Stocks and Bonds
You may also hold stocks and bonds in regular investment accounts. Many people have significant savings invested in stocks and bonds, rather than just having the money sitting in a bank account accumulating minimal interest.
If you invest in the market outside of your retirement planning, these resources can be funneled into your retirement income as well. Some stocks pay dividends, and some bonds pay interest. Both can be sources of retirement income. (7)
Health Savings Accounts
Health Savings Accounts (HSAs) are often overlooked as a potential vehicle for retirement income. If you have high-deductible health insurance, then you may qualify for an HSA. It provides an opportunity to save pre-tax money in an account that can be used to pay qualified medical expenses today or in retirement.
What you might not know is that in retirement, once you reach a certain age, you can even use the funds for any non-medical expenses you want. You can invest the savings in your HSA, too. So this is another tax-advantaged way to accumulate funds for retirement. (8)
Inheritance
Is it likely that you’ll get an inheritance leading up to or during retirement? Maybe not. Receiving an inheritance from parents or loved ones is actually less common than many people think. The most recent research from the Bureau of Labor Statistics found from 1989 to 2007, just 21 percent of American households received an inheritance. But if you’re one of the lucky few, the assets you receive can be used to generate income in retirement or leave a legacy for your heirs. (9)
Guaranteed Income Sources
Having a stable and predictable income is a high priority for many retirees. The 2019 Retirement Confidence Survey reported income stability is a higher financial priority than conserving wealth for two out of three retirees. There are a variety of products in the market that offer guaranteed income.
One of the easiest ways to achieve guaranteed income is to buy it by purchasing an annuity with a lump sum that pays out over your lifetime, or the lifetime of you and your spouse. You’ll want to talk to a trusted advisor about some of the pros and cons, but an annuity or other form of guaranteed income is something to consider. (10)
Home Equity
Your home is probably one of your most valuable assets. Your equity – the difference between the value of your home and what you owe on your home – could be a source of retirement income. Home equity loans and reverse mortgages can help you access home equity without selling your home. Again, this is something you’ll want to think about carefully and discuss with your financial advisor, but it’s certainly worth considering in many cases. (11)
Bottom Line
When you take a look at all of the available vehicles for retirement income, you may find that you really are on track to have the retirement you desire.
The first step in building a retirement income strategy is deciding what you want life in retirement to be like. Once you know, you can estimate costs and develop a plan. Typically, a sound retirement income strategy will have guaranteed income, flexibility, and growth potential. If you would like some help as you plan for life in retirement, give us a call. We’d be happy to help.
Sources:
1 https://www.ebri.org/content/retirement-savings-shortfalls-evidence-from-ebri-s-2019-retirement-security-projection-model
2 https://www.troweprice.com/content/dam/fai/Collections/DC%20Resources/helping-workers-prepare-for-successful-retirements/DCSystemSuccess.pdf (Page 4)
3 https://www.finra.org/investors/learn-to-invest/types-investments/retirement/managing-retirement-income/sources-retirement-income
4 https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
5 https://money.usnews.com/money/retirement/articles/a-guide-to-getting-a-pension
6 https://www.investopedia.com/ask/answers/102714/how-are-ira-withdrawals-taxed.asp
7 https://www.investopedia.com/articles/financial-advisors/020116/are-dividend-stocks-good-substitute-bonds.asp
8 http://www.hsabank.com/hsabank/learning-center/health-savings-accounts
9 https://www.bls.gov/osmr/research-papers/2011/ec110030.htm
10 https://www.ebri.org/docs/default-source/rcs/2019-rcs/2019-rcs-short-report.pdf
11 https://www.investopedia.com/mortgage/reverse-mortgage/reverse-mortgage-or-home-equity-loan/
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
