Get On Target
It would be pointless to practice your marksmanship without a target. How on earth would you know if you were getting any better? If you want to retire at some point in your life, having a plan and a target will help you immensely. While you may not want to be average, understanding what the average American is doing can at least give you a starting point as you are making decisions for your future. If nothing else, it can give you some perspective.
Talking about Money is Taboo
Here in America, it seems like people are more comfortable talking about their love life than their income and spending. Because we are so protective about our finances, it’s little wonder retirement planning seems so mysterious to many people. Understanding what the average person's retirement sources are and the average retirement expenses can help us shed some light on this issue. Let’s break down these mysteries. Most of this information is averages from the Social Security Administration.
What Are the Average Income Sources in Retirement?
According to the Social Security Administration, the average retirement income in America is $44,375. The top 3 sources of this income in retirement are:
- Social Security: 33.2%
- Earnings: 32%
- Pension: 20.9%
Source: Income of the Aged Chartbook, 2014, SSA Publication No. 13-11727, Social Security Administration (April 2016).
Here are a few things you should think about when you're planning for retirement. Most people need at least 70% of their pre-retirement income in retirement. If the average American uses Social Security to provide only 33% of their retirement, it should be a reminder of how important personal savings for retirement are. It's easy to forget that putting away $11.54/week over 30 years (assuming an 8% annual effective rate) can yield $75,015 in savings. This brings the small changes you make on a daily and weekly basis into perspective. If you want more in retirement, save more for retirement.
What Are The Average Top 3 Expenses in Retirement?
Below is the Full List from the Social Security Administration
Source: Expenditures of the Aged Chartbook, 2015, SSA Publication No. 13-11832, Social Security Administration (January 2018).
Roughly $15,000 of the average retiree’s expenses are housing costs. People forget there are housing costs even if you have paid off the mortgage. Don’t forget about maintenance, repairs, insurance, property taxes, etc. Some people may downsize or join a retirement community.
About $6,800 of the average retiree’s expenses go to transportation. You may not be putting as many miles in commuting, but you’ll still have maintenance and someone has to spoil the grand-kids. Transportation is easy to overlook. But, let's face it, cars don't last forever.
#3 Health Care
Even though this expense comes in third, the long-term inflation of medical expenses is 5.28% (https://ycharts.com/indicators/us_health_care_inflation_rate). Personally, I think this is one of the most underestimated retirement expenses. Life expectancy has gone up over the years. An increased life expectancy doesn't mean it will be without an increase in health costs.
Set a goal, create a target, and get to work. While your expense and income sources will be unique to your retirement, knowing what the average American is doing, can at least give you some perspective. If you want to improve your situation, make small changes today. If you are the Plan Sponsor of a retirement plan, helping your employees understand the importance of taking action today is also critical.
Please reach out to us if you would like a second opinion on your retirement plan.
Social Security Administration. (2016, April). Income of the Aged Chartbook, 2014. Retrieved from ssa.gov: https://www.ssa.gov/policy/docs/chartbooks/income_aged/2014/iac14.pdf
Social Security Administration. (2018, September). Fast Facts & Figures about Social Security 2018. Retrieved from ssa.gov: https://www.ssa.gov/policy/docs/chartbooks/fast_facts/2018/fast_facts18.pdf
YCharts. (2020, March). US Health Care Inflation Rate:4.73% for Mar 2020. Retrieved from YCharts: https://ycharts.com/indicators/us_health_care_inflation_rate