Planning for your retirement is a big job, and one that tends to occupy more of a person’s mental energies as they age. Ultimately, arriving at a good strategy for living out your golden years boils down to thinking about a goal for your retirement savings and then working backward to figure out how much to save.
A good way to gauge your preparedness to see if you’re on track or need to save more aggressively is by acquainting yourself with statistics around average retirement income. That will be our focus today; we’ll start by getting clearer on what average retirement income is, and then we’ll talk about some of the more popular means by which people are saving for their retirement. Along the way, we’ll discuss some common (and not-so-common) ways of getting your numbers up.
The average retirement income refers to the average income generated by any combination of retirement savings vehicles and regular work activities. The most common way to break this down is by age, and that’s what we’ve done in the following table using retirement data from the United States Census Bureau.
| Age Bracket | Median Annual Income | Mean Annual Income |
|---|---|---|
|
55-59 |
90,980 |
126,500 |
|
60-64 |
72,120 |
106,100 |
|
65-69 |
59,430 |
87,860 |
|
70-74 |
55,990 |
79,920 |
|
Over 75 |
41,060 |
62,740 |
There are a few things to note about this data. First, you can see that we’ve included the 55-59 and 60-64 age brackets. In the United States, it’s common for people to retire in their early 60s. This means that many of the people in the 55-59 age bracket haven’t actually retired yet, and at least some of the people in the 60-64 age bracket won’t have retired yet either.
What’s more, there’s no principled distinction drawn between retirement and non-retirement income, so if there are 78-year-olds running a financial consulting business making $1 million a year, that’s going to skew the numbers.
Nevertheless, we think this is useful context, and it should give you some idea of what people the same age as you are making. And if you’re not happy with the picture painted by the numbers, consider reaching out to a financial professional who can help you structure a more aggressive plan.
Another, more subtle thing worth pointing out is the difference between the mean and the median in the table above. To flesh out the picture, we’ll briefly cover how these two figures are arrived at so you can more accurately use the numbers.
The mean is calculated by adding up all the incomes of a group of people and then dividing by the number of people in the group. So, if you wanted to know the average income of your friends, you’d (delicately) ask them how much money they make and then divide this sum by however many friends gave you an answer.
It’s not hard to see the problem with this, however. Suppose you become friends with Elon Musk, whose net worth is currently in the neighborhood of 300 billion dollars. Even if none of your other friends were making more money than they were before, the average income for the group would skyrocket immediately.
This is because the mean is susceptible to skew when outliers are present, and the median is one way of combatting this tendency. The median essentially divides a dataset in half, so if you had seven friends and ranked them in order of their respective earnings, the median friend would be fourth on the list because there would be three friends below them and three friends above.
In the context of average retirement income, the median value is probably the more informative one. This is especially true if there’s a big discrepancy between the median and the mean because that’s a good sign there are outliers in the dataset. For instance, in the 70-74 age bracket, the mean income is nearly $80,000 a year, while the median income is in the mid $50,000s. A few wealthy septuagenarians are likely pushing the mean figure up, so you should look at the median for perspective.
Now that you know more about where you stand in terms of average retirement income, let’s discuss some of the ways in which people save for their retirement. Along with the statistics presented above, this should give you a good foundation to start thinking seriously about how you’ll fund your final decades.
One way people keep the lights on during their old age is to simply continue working. Though this may sound unappealing if you’re personally looking forward to leaving your career behind, bear in mind that work is a significant source of meaning in people’s lives; many find the challenge of making decisions and solving problems very rewarding, and have little interest in trading that in for more time to catch up on their reading.
Note that this doesn’t necessarily refer to being employed full-time. Experienced professionals with 30 years in a field often have a lot to offer as consultants or advisors, even if they’re no longer clocking in 8-10 hour days.
Social Security is a federally administered program that provides a range of services. It’s best known as a retirement savings/income plan, but it also plays a role in funding disability benefits, among other things.
Though Social Security involves many complexities, the basic rules aren’t hard to grasp. Throughout your working life, you’ll pay into the program, usually when your employer withholds a portion of your paycheck. When you reach 62, you’ll be eligible to start taking Social Security payments as long as you’ve been paying in for at least a decade. The actual payouts vary from one individual to the next and are calculated based on your income during your 35 most remunerative years. If you wait until 70 to start drawing from the program, you’ll receive more.
Annuities are contracts established between an annuitant (you) and an annuity provider (an insurance company). There are many different kinds of annuities, but they almost all involve the annuitant funding the contract, either through a series of payments or in one lump sum, and then receiving an agreed-upon monthly income stream at some point in the future.
Given this structure, it’s easy to see why annuities are a popular form of retirement savings. You can buy an annuity during your prime working years and then use that to pay your bills when you stop working later.
Because annuities are so flexible and come in so many variants, we can’t cover all the ways of maximizing them here, but it largely boils down to how much money you can put into the annuity in the first place. If you can maximize that amount, then you can maximize your chances of living comfortably in retirement. If you have any further questions, get in touch!
One other thing that’s worth knowing is that annuities can also be set up to pay your loved ones when you pass away. Joint-life annuities, for example, will continue payments to a spouse, making it popular for married couples planning for their future.
A final way that people have traditionally saved for their retirement is through a pension, which is a kind of defined benefit plan. Pensions are established through your employer, who funds it on your behalf. When you retire, you’re given either a lump sum or a series of monthly payments.
Over the past few decades, pensions have become substantially less common because they place an enormous financial burden on employers.
Arming yourself with information is an important part of winning the battle to plan your retirement. Knowing the average retirement income helps you better understand where you’re at in your own savings and will help you decide whether you need to be more aggressive or not.
If you need help with planning your retirement — especially if you’re intrigued by the potential of using annuities — get in touch with one of the annuity specialists at AnnuityAdvanage today. These are complex topics, but with the right guidance, you can rest easy knowing your future is secure!
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