Are you concerned about whether you will have enough saved to support you throughout your retirement? Here are a few facts about retirement savings to consider while you evaluate your retirement prospects.
What is the average retirement income in the U.S.?According to 2016 data from the U.S. Bureau of Labor Statistics, the average American retiree takes in $48,000 and spends close to $46,000 (both before taxes).
Where does retirement income come from?
Social Security is a major source of income for many retired Americans.
In 2018, 63 million Americans will receive a collective $1 trillion in benefits, according to data from the Social Security Administration. The average monthly Social Security benefit for each retired worker comes to around $1,413, or just under $17,000 a year.
In addition to Social Security, earnings from private and government pensions provide income for the many American households.
There are other options that can help boost your income stream, including delaying the start of Social Security, increasing your 401(k) contributions and opening an IRA. Some individuals may be able to supplement their retirement income with an inheritance, but this is not something people should count on. Plus, you might have to pay taxes on it. A financial advisor can help you determine if any of these strategies are appropriate for you by asking detailed questions about your financial situation, lifestyle and expectations for the future.
How much retirement income do you actually need?
Many investment experts recommend you save at least 15 percent of your pre-tax income each year. That might sound like a lot, but it will go quickly, especially when you add in the fact that people are living longer and healthcare costs are rising.
If saving isn't easy for you, you might want to consider automating your savings with an automatic savings plan.
There are several factors that can impact your retirement income needs. The first is your day-to-day living costs. On average, those who are older than the age of 65 spend $45,756 a year, according to government statistics.
There are a handful of questions you can ask yourself to help you get a good idea of how much your retirement expenses will be and what you'll need to live comfortably:
- What is your current monthly take-home pay?
- What expenses, such as health insurance, will you have to pay out-of-pocket once you are retired?
- What are your extra costs (such as vacation travel)?
- Do you have expenses that will decrease in retirement (such as commuting or the cost of work clothes, for example). Keep in mind that your payroll taxes will be eliminated totally if you are no longer working, so that's another expense you won't have to cover.
By realistically approximating your retirement expenses and income, you'll start to get a rough estimate. It's also a smart idea to figure out how much tax you can expect to owe on your retirement income.
Next, you'll estimate how much you're likely to receive from Social Security and from any pension you may have, then add in any other savings. For most people, their Social Security check replaces about 40 percent of their income during retirement.
Generally, to approximate your Social Security income, you'll need to know an idea of how much you will have earned while working. You will also need to know what age you will be when you sign up to receive your benefits. Your total will be a percentage of your average lifetime earnings, and it is calculated based on your 35 highest-earning years.
The Social Security Administration's Quick Calculator can provide an estimate in both current and inflation-adjusted dollars. By calculating how much you'll receive in Social Security, you can get a better sense of what your average retirement income will be and if you'll need to consider adding more income from another source.
If you've run the numbers and feel that you won't have enough money to retire, don't worry. There are steps you can take to start saving more. You might want to consider downsizing your lifestyle or working longer to bolster your savings. It may pay off to postpone filing for benefits until after the age of 67, which is considered the full retirement age for most individuals.
There's more good news about getting older: When you turn 50, you can also contribute more money to tax-deferred accounts. In an employer-sponsored retirement plan like a 401(k), the maximum annual contribution limit increases by $6,000 thanks to catch up contributions for those age 50 and over.
In an IRA (Roth or traditional), you can start saving an additional $1,000 on top of the $5,500 annual ceiling. No matter what your plan is, the sooner you can start saving, the better off you'll be in retirement, and you should revisit your savings goals every year.
Additional retirement income sources
There are other options available that are designed to boost your savings and ultimately your retirement income, such as annuities, which can be a smart solution to help meet your retirement needs. Annuities offer the potential for tax-deferred growth, meaning you don't have to pay income taxes on investment gains within the annuity until you withdraw funds.
Also, annuities can provide a steady stream of income for either a determined period of time or for your lifetime. Finally, an annuity may be helpful because it can pay a death benefit directly to your beneficiaries during the accumulation phase, minimizing the stress of the loss and helping them avoid a prolonged probate process.
Still have questions? For more information on retirement planning and saving, visit the Protective Learning Center.