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June 4, 2010 Friday 11:25 AM EST
SECTION: PERSONAL FINANCE; Retirement; Robert Powell
LENGTH: 949 words
HEADLINE: Here’s how you’ll pay for retirement
BYLINE: Robert Powell, MarketWatch mailto:email@example.com
BOSTON (MarketWatch) — Retirement planning isn’t about “the number,” but the numbers — your assets, liabilities, expenses, and income. The more you know about those numbers, the more likely your retirement plan will become a reality instead of a pipe dream.
A new report will help you get a better handle on at least one of those numbers: income. The average retiree depends on four sources of income in retirement, according to the latest study from the Employee Benefit Research Institute.
EBRI’s report also shows that retirement-income sources vary dramatically depending on income and age. While it’s important to benchmark yourself against the averages, it’s also wise to read between the rows and columns of the report’s tables.
But first, the overall average: Social Security continues to be the largest source of income for the 36.5 million Americans age 65 and older in the U.S.
Social Security accounted on average for almost 40% of income for that population in 2008. Pension and annuities was about 20%, income from assets (including assets in tax-deferred and taxable accounts) was 13%, and income from earnings was 26%, according to EBRI’s analysis of recent U.S. Census data.
Social Security is key — especially for low-income retirees
If you are among the 6.2 million 65-and-older Americans in the lowest income quintile, with income of less than $8,956 in 2008, then Social Security represents the bulk of your income at nearly 80 cents on the dollar. Other sources, such as pensions, annuities, IRAs, taxable accounts, and earnings from work, make up the remaining 20 cents.
If you’re in the highest income quintile, that is, one of the 7.5 million older Americans who had income of more than $38,332 in 2008, then your sources of income were somewhat diversified, with the bulk coming from earnings at nearly 40 cents on the dollar. Other sources of income were represented in nearly equal portions: pensions and annuities, 23%; Social Security, 19%; assets, 18%; and other, 2%.
Also of note is just how important Social Security is to those aged 65 and older. Nearly nine in 10 of the 36.5 million Americans in that cohort, or 33 million people, receive Social Security. By contrast, just 20%, or 7.3 million, receive income from earnings.
The other point worth noting about Social Security is that any changes to the system could come with a raft of unintended consequences. In other words, you’re more than welcome to plan on Social Security representing 20% of your income in the future, but it might be wise to project that it will represent an even lower percent just to be safe.
Percent of income from earnings declines over time
Yes, Americans do work past age 65. But you shouldn’t plan on income from earnings being a constant over the course of your retirement, because earnings as a percent of income declines as you age. This report offers a sense of just how much.
For instance, earnings accounted on average for 41% of the income of those in younger age groups, ages 65 to 69, but just 25% for those aged 70 to 74. Then income from earnings drops dramatically to 13% for those age 75 to 79; 9% for those age 80 to 84; and 7% for those age 85 or more.
Also, whether you work in retirement depends in large part on your health and the type of career you had before age 65, according to Ken McDonnell, director of the American Savings Education Council and chairman of the ASEC Policy Board. Wealthy Americans and those who had white-collar jobs prior to age 65 are more likely to keep working past age 65 than those who are not so wealthy and those who had blue-collar jobs.
Pensions and annuities
Right now, about one-third of retirees receive income from a pension — a traditional defined- benefit plan — and annuities. On average pensions and annuities represent nearly 20% of the income of the average 65-plus American — less for younger retirees and more for those aged 70 and older. That’s all well and good, but we also know that the 77 million baby boomers who have yet to retire likely won’t have a traditional pension.
Those boomers who don’t have a pension will have to look to their assets to make up the 20% of income that the average retiree currently receives from a pension or annuity.
If the report is clear on one thing, it’s this: The money you set aside in your 401(k), IRA, and taxable accounts plays a big role in the retirement of those aged 65-plus now. And that money is likely to play an even bigger role given the decline of income from defined-benefit plans and possibly Social Security over time.
Right now, nearly one in two Americans age 65-plus have income from what EBRI refers to as “assets,” but reading the report shows that income from assets becomes more important as one ages and receives less from earnings. For instance, for those aged 65 to 69, assets represent roughly 11% of income. But as one ages, income from assets rises to 15% of total income.
What’s the takeaway here? If you don’t have a pension, you don’t want to rely on Social Security and you don’t think you’ll work in retirement, that leaves your assets as your main source of retirement income. There are other possible sources of income such as a reverse mortgage, the cash value in your life insurance or an inheritance. But in the main, you’ll have to save enough and invest well enough to create a nest egg that will replace all the income that might have come from pensions, Social Security and work.
How much more? According to McDonnell, “you can’t go wrong saving a bit more.”
You couldn’t go wrong by saving a lot more either.
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