According to a recent study by the Center for Retirement Research at Boston College, the following percentages represent how much the average American will need to rely on personal savings to provide income throughout retirement:
- Low-income households: 25 percent
- Middle-income households: 32 percent
- High-income homes: 47 percent
These numbers reflect the contribution of Social Security income. For Americans with less income, government benefits account for a higher percentage of household income. Higher-net households, on the other hand, must contribute a larger share of their savings to maintain their pre-retirement standard of living. As a general rule, Social Security provides 30 percent to 40 percent of household income for the average retiree.
However, it‚Äôs important to recognize that each household is different. For example, single women fall into a much direr category. Social Security benefits tend to represent a higher share of household income for elderly unmarried women ‚Äì 50 percent of whom rely on Social Security for 90 percent or more of their income.
Note, too, that the average elderly unmarried woman does not spend the majority of her adult life as single. Many outlive their husband and subsequently become more dependent on entitlement benefits, especially if much of the family wealth was spent on medical treatment and long-term care for the husband before he died.
Clearly, there are many factors that lead women down a path to impoverished retirement. These include lower pay than men throughout their careers, time off from the workforce to raise children and/or provide care to elderly relatives, not to mention the fact that women tend to live longer than men. There are also other factors that contribute to eventual poverty, such as divorce, loss of spouse or being forced to retire due to poor health.
However, women aren‚Äôt the only ones at a disadvantage when it comes to saving for retirement. Low-income workers ‚Äì including people who clean houses, drive school buses and maintain the lawns of higher income families ‚Äì have difficulty just making ends meet, let alone saving for retirement. Consider that someone making $7.25 an hour, 40 hours a week for 52 weeks a year earns only $15,080 a year before taxes.
Retiree income generally consists of several different resources, such as a pension, investments and personal savings. However, with fewer employer-sponsored pension plans offered, a greater burden is placed on individual savings and investments. There are two problems with these income sources. First, the current savings rate in America averages 5.5 percent of income, a significant drop from the average 11.9 percent personal savings rate of 50 years ago. Moreover, persistent low interest rates have curbed yields from traditional savings accounts.
Second, IRAs, company 401(k) plans and individual investment portfolios are subject to the volatility of the stock and bond markets. While these securities tend to grow substantially more than bank savings vehicles over a long period, people who have had to curtail investment contributions due to wage stagnation might have missed out on gains from the long-running bull market.
Since so much retirement income must now come from savings, pre-retirees and retirees are looking for ways to maximize their assets. One strategy is to simply work longer in order to save more money and allow investments more time to grow. Recent statistics show that there are more than 35 million Americans age 55 and older in today‚Äôs workforce, compared to just below 16 million in the same age range 20 years ago.
Retirees seeking ways to maximize retirement income sources might want to consider maintaining a prudent annual withdrawal rate from their investments, laddering a bond portfolio or purchasing an annuity with some of their savings to generate guaranteed income to last throughout retirement.
Bear in mind that each of these strategies has advantages and drawbacks that can affect a retiree‚Äôs long-term financial security. It‚Äôs important to work with an experienced financial advisor to tailor a retirement income strategy based on unique financial circumstances.