Why You Need Extra Retirement Income

A huge divide is developing between the people who will retire on Social Security alone and those who will have extra retirement income ... from a pension, 401(k), IRA, or job.

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!


Sources:

http://time.com/money/3752868/retirement-divide-elite/

http://www.kiplinger.com/tool/retirement/T047-S001-retirement-savings-calculator-how-much-money-do-i/

Looking for more retirement ideas?  Use the tabs or pull down menu at the top of this page to find links to hundreds of other articles on financial planning, affordable places to retire, health concerns, family issues, etc.

You are reading from the blog:  http://www.baby-boomer-retirement.com

Photo credit:  Photo of golf course taken by author, Deborah-Diane; all rights reserved.

Retirement Planning Is a Three-Legged Stool

Shortly before my recent retirement from my long-time job for a local school district, I attended a retirement seminar that was designed to help employees make sure they are financially prepared to stop working.  One of the things the speaker told us was that retirement is a three-legged stool, with Social Security as only one of the legs.  Here is how he explained it:

As mentioned above, the first leg of your retirement stool is Social Security.  This national pension program was never intended to be the only way that retirees supported themselves during their senior years.  Since recipients only receive a median benefit of about $1200 a month, this is not enough for anyone to fully support themselves.  If you had a stool with only one leg, you might be able to balance on it for a short while, but eventually you would fall over.

The second leg of the stool is a pension, annuity or fund.  At one time, many private companies provided their employees with a pension.  Today, only a few private companies still provide this perk, although some public employees, such as non-certificated school employees, still receive a pension.  Pensions are complicated.  For example, I had a job in which I paid into both the state pension plan as well as Social Security.  Therefore, I am able to collect both.  However, many people (such as California teachers) are only able to collect one or the other, in most circumstances.  If you do not have a pension, you may wish to take a portion of the money you have saved in your 401K or IRA and use it to invest in an annuity or investment fund in order to provide additional income.  This is the second leg of your stool.  At this point you have income from Social Security and income from a second source ... a pension, annuity or mutual fund.

The third leg of the stool, as suggested by the speaker at the retirement seminar, is your savings.  This is money that is accessible and not tied up in an investment.  It is money you can use in an emergency.  Everyone should have an emergency fund.  The size should depend on your available assets and your income.

The retirement consultant did not discuss the fact that the majority of Baby Boomers do not have enough savings to invest in an annuity or fund, let alone have enough put aside for emergencies.

However, if he had talked about it, he would probably have suggested that Baby Boomers find a way to earn a little extra money after retirement, as well.  As you will see in the Money section of this blog, I have written several blog posts over the years about ways that retirees can continue to earn money after they retire in order to supplement their income.  (We might think of a retirement job as the fourth leg of your stool.)

I have also written posts about how to save money, including cheap places to retire in both the United States as well as overseas.

In addition, you may want to consider downsizing.  Many people who have a lot of equity in their homes decide to sell the house, downsize and use the money they now have to put in savings and invest in various ways.  This is how they get the other two legs of their "stool."  Some people choose to get a reverse mortgage.  However, as I have mentioned in the past, this can be a dangerous decision and should only be reserved for people who are quite elderly.

If you are hoping to retire and you haven't saved enough money, you may want to check out some of the posts listed in the index articles listed below:

Gifts, Travel and Family Relationships

Great Places for Boomers to Retire Overseas

Great Places to Retire in the United States

Health and Medical Topics for Baby Boomers

Money and Financial Planning for Retirement

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