Over half of Americans have no retirement savings at all and of those that do, the majority fall short of savings targets by age and income. Knowing how you compare to the average American household can help you figure out how much of your income you’ll have to supplement in order to have a healthy monthly retirement income.
How Much Income Do Retirees Have?
As a general rule, you’ll need about 70-80% of your pre-retirement income to maintain a similar standard of living in retirement and cover your expenses. This amount will generally cover the cost of healthcare, housing and other necessary expenses while also allowing a little freedom as well. Your income in retirement will come from three sources.
1. Social Security Benefits
According to the Social Security Administration (SSA), more than 85% of people 65 and older receive Social Security benefits. Of that, 38% depend on Social Security for the majority of their retirement income. However, Social Security was never meant to be a primary source of retirement income; it is supposed to be supplemental. The average retirement income from Social Security is as follows:
|2020 average monthly income from Social Security||$1,503||Depends on retirement age and lifetime earnings of both spouses. If both spouses collect the average monthly income, $3,006 monthly|
|2020 average annual income from Social Security||$18,036||If both spouses collect the average monthly income, $36,072 annually|
|50% or more of income comes from Social Security||71%||50%|
Use the SSA’s Social Security Retirement Estimator to project how much of your retirement income will come from Social Security.
To be eligible for Social Security Benefits, you need to have worked and paid into the system for a minimum of 40 quarters or 10 years.
How to Calculate Your Social Security Income
Your Social Security income is calculated using 2 factors:
- Age. When you chose to retire affects how much you receive in Social Security benefits. You can collect Social Security as early as age 62 or as late as age 70. However, the earlier you start collecting, the less you receive in benefits. According to the SSA website, if you turn 62 in 2020 and start collecting your Social Security benefits, your benefits would be about 28.3% lower than if you waited until full retirement age (66 years and 8 months).
- Earnings. The SSA averages your monthly earnings over the 35 years that you earned the most. Higher lifetime earnings translates into higher Social Security benefits. If you’re married, then the amount each spouse receives depends on their work history.
For 2020, the maximum monthly benefit is:
- $3,790 if you file at age 70
- $3,011 if you file at full retirement age (currently 66)
- $2,265 if you file at age 62
If Social Security is your only source of retirement income, then you probably won’t pay income taxes in retirement. If you have additional sources of income, then up to 85% of your Social Security income may be subject to taxes.
2. Retirement Savings
Most retirees don’t have pension plans and Social Security income isn’t enough to maintain a pre-retirement standard of living. So, for most retirees, the primary source of income comes from retirement accounts such as 401(k)s and Individual Retirement Accounts (IRAs).
A 401(k) is a defined contribution plan. A defined contribution plan is an employer-sponsored retirement savings plan that allows employees to save and invest some of their paycheck before taxes are taken out. Employers can either match employees’ contributions or contribute partially. Contributions are invested and the retirement benefits an employee has access to for income reflects their investment’s gains or losses. Unlike a pension plan, a defined contribution plan like a 401(k) doesn’t guarantee payment in retirement. There also are limits to how much you can contribute to a 401(k). In 2020, 401(k) contribution limits rose to $19,500 per year.
There are two types of IRAs: Simple IRAs and Traditional IRAs. Both tax-deferred retirement plans. You contribute pre-tax money, allowing for tax-deferred growth, then pay taxes years later when you withdraw. Ideally at a lower tax rate than you are currently paying. Like a 401(k), there are annual contribution limits to IRA accounts.
Traditional IRAs are set up by individuals and only account owners can make contributions. Traditional IRAs can be used in combination with or to supplement an employer-sponsored 401(k) or Simple IRA account. Traditional IRA contributions are lower than Simple IRA contributions, $6,000 per year in 2020 ($7,000 per year if you are over 50).
Simple IRAs are an employer-provided retirement account designed for employees without a traditional 401(k). Both employers and employees can both make contributions to Simple IRA accounts and in 2020, Simple IRA contributions increased to $13,500 annually ($16,500 if you are over 50).
3. Pension Plans
A pension is a defined-benefit plan. A defined-benefit plan is a retirement plan funded by your employer, though in some cases employees may be required to contribute to the plan as well. Typically, a pension amount is determined by factors such as salary, length of service, and years of enrollment. Pension plans guarantee retirees a certain income each month regardless of how their investments performed.
Pension plans are becoming a less common source of retirement income. As of 2019, only about 30% of today’s retirees receive income from a pension plan. The reason is simple: most employers don’t offer pension plans anymore. Annual pension benefits range from about $9,000 per year for a private pension to about $22,000 per year for federal government pensions.
How Much Income Do Average Savings Produce?
Typically, you can plan to withdraw around 4 percent of your retirement savings each year. If you have $100,000 in retirement savings and assuming that you have a 4 percent annual return, that would provide around $4,000 in retirement income your first year of retirement or about $333/month.
How Much Savings Do Retirees Have?
Despite increases to retirement savings contributions, most households do not have sufficient retirement savings. According to the National Institute on Retirement Security, based on 401(k) and IRA account balances, 92 percent of working households fall short of retirement savings targets for their age and income.
401(k) accounts are the most common retirement savings account that the majority of retirees rely on for retirement income. Below is a table breaking down the average 401(k) account balance by age group in 2019.
|Age Group||2019 Average 401(k) Balance|
How to Increase Your Retirement Income and Savings
There are several actions you can take now to increase your savings and income when you retire.
Increase Your Social Security Income
One way to boost your retirement income is to focus on securing higher social security benefits. Here are a few suggestions:
- Postpone collecting benefits. The longer you wait, the more you will collect. If you wait until age 70, you can collect almost $300 extra each month. However, there is no benefit for waiting after 70 to collect benefits.
- Higher earning spouse defers. If you are married, the higher earning spouse should defer the start of benefits for as long as possible so that you can maximize your monthly Social Security benefits as a couple.
Increase Your Retirement Savings Income
- Maximize your account savings contributions. Take advantage of pre-tax contributions and max out your account contributions.
- Have multiple retirement savings accounts. Maximize your benefits by having multiple pre-tax and tax-free retirement savings accounts.
- Maximize catch up contributions. If you’re over 50, take advantage of the extra contributions you can add to your retirement savings each year.
- Eliminate or reduce unnecessary expenses. Use a spreadsheet or app to help you keep track of your expenses and find ways to eliminate or reduce discretionary expenses.
Find a Financial Advisor
If you want to start planning for retirement but aren’t sure where to begin, reach out to a financial advisor for help. In addition to offering holistic financial advice, financial advisors can offer specialized advice on how to plan and prepare for retirement. Make sure you know what your retirement goals are before meeting with an advisor so that he or she can analyze your economic situation and help you come up with a manageable plan to achieve your goals. Use a free tool like SmartAsset’s financial advisor matching tool to find an advisor in your area.
Are You Ready for Retirement?
Retiring is not as simple as packing up your stuff and walking off into the sunset of your later years. It takes serious planning and foresight. You need to consider your anticipated expenses, anticipated income and anticipated length of retirement to know how much to budget and save for. Talk to a financial advisor about ways that you can maximize your retirement savings leading up until your retirement as well as ways to maximize your income during retirement so that you feel secure in your post-working years.