When American workers are all averaged together, the typical worker is on track to replace only about 58% of their current income when they retire. Unfortunately, things are getting worse, not better. In just one year, from 2014 to 2015, the average income replacement estimate for the typical American worker dropped from 61% down to 58%. This will not provide a lavish retirement, but it could be survivable ... if the average actually reflected the reality for most workers. However, even these averages are misleading.
In reality, most people fall into one of two groups ... those who are going to rely on Social Security alone and those who will have Social Security plus at least one additional source of retirement income. The first group will be barely able to feed and house themselves; the other group will be traveling or moving to luxurious retirement communities, enjoying golf and other amenities.
Here is how things actually break down:
Those who have a 401(k) and/or other retirement plan are on track to replace 72% of their current income.
Those who do not have a supplemental retirement income will, on average, only replace about 42% of their current income.
How Much Income Will You Need in Retirement?
According to most financial planners, you should have a goal of replacing about 75% to 80% of your current income when you retire. This means that nearly everyone will need to have a supplemental source of income, beyond Social Security. If you are currently in the category of people who are on track to only replace 42% of your income, because you expect to retire on Social Security alone, you may want to start re-thinking your approach to retirement.
How Can You Supplement Your Retirement Income?
There are a variety of options for supplementing your retirement income. Many people use a combination of several sources. Here are some common ideas:
Contribute to a 401(k) through your current employer;
Make large contributions to an IRA or Roth IRA;
Continue working in your current occupation as long as possible;
Start an encore career in a field that interests you;
Get a part-time job;
Earn a pension through your current occupation (although this is becoming less common).
Since no one can be sure how long they will be able to work, either in their current career or in an encore career, before they have to stop working due to health issues or layoffs, the smartest decision is for everyone to contribute to a 401(k), IRA or a private retirement plan during their working years. Even if you are on the brink of retirement, it is not too late for you to try to maximize payments into a retirement plan so you have some way to supplement your income in your later years.
How Are the Top Retirement Savers Doing It?
The most successful or "elite" retirees are those who have consistently saved 10% of their take-home pay towards their retirement. About 20% of all workers fall into this group and they are likely to retire, on average, with an income of about 143% of their current retirement income!
These are the people who will be able to feel confident that they will not run out of money, even if they live for decades after they stop working. In addition, they will be able to do most of the things they always wanted to do after they stop working ... live where they want, go on cruises, take fun trips, etc.
Which Type of Retiree Do You Want to Be?
Obviously, in order to save 10% of your current income, you need to be able to live on 90% of your earnings during your working years. Some people believe that is impossible for them. However, imagine what your life will be like if you have to live on only 42% of what you do now. That will be far more painful.
Whether you are a young adult in your twenties, or a working Baby Boomer in your fifties, it is never too early, nor too late to start saving for retirement. If you already have a retirement plan, you may want to talk to a retirement expert to find out whether or not you are on track to replace at least 75% of your current income ... and more, if possible. You can also use a retirement savings calculator, like the one from Kiplinger's. You can find a link to it under sources.
Remember: It is up to you to determine whether or not your Golden Years really will be Golden!
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Photo credit: Photo of golf course taken by author, Deborah-Diane; all rights reserved.