A harsh financial reality facing retirees

Here's a discomforting point made at the very beginning of a recent landmark report titled "The Nation's Retirement System": "Most financial advisers say retirees will need 70 percent or more of preretirement earnings to live comfortably." 

Unfortunately, many older workers and retirees will fall far short of this goal.

The report, prepared by the US Government Accountability Office (GAO), goes on to say one-third of households headed by someone age 65 and over received 90 percent or more of their retirement income from Social Security. That's a problem because Social Security replaces only about 40 percent of an average wage earner's income after retiring.

According to Social Security's "Fast Facts" publication, 62 percent of retirees received at least half of their income from Social Security in 2015.

These numbers reveal the harsh reality facing most older workers and retirees: They'll need to learn to live on income that's a lot less than what financial planners commonly recommend. That result may be undesirable, depending on your circumstances, resiliency and resourcefulness.

Most financial advisers base their recommended retirement income goals on the assumption that you want the same aftertax income in retirement compared to your working years. Presumably, you need less total gross income in retirement because your income and FICA taxes drop substantially, and you're no longer saving for retirement.

Some people will be able to live on lower income in retirement because their living expenses might fall substantially, for a number of reasons. For instance, it's possible they may not have child-related expenses, they might have paid off their mortgage or downsized their home, or they might have reduced their transportation expenses by having just one car. For these people, a reduced standard of living is an acceptable price to pay for their freedom from work.

For others, a significant drop in retirement income will cause hardship. They may not be able to reduce their living expenses significantly, or they might have substantial out-of-pocket expenses for medical or long-term care.

Statistics on the amount of retirement savings accumulated by older workers confirm that many will fall short of an income that equals 70 percent of their preretirement pay. For example, the "2017 Retirement Confidence Survey" by the Employee Benefit Research Institute shows that only 35 percent of workers age 55 and older have accumulated $250,000 or more in retirement savings. 

That amount would generate roughly $10,000 in retirement income, using the 4 percent rule to estimate the amount of income that can be generated by retirement savings. This amount, when combined with Social Security income, most likely will fall short of the often recommended 70 percent goal.

Financial planners working with middle-income workers who are approaching their retirement years will need to recognize many of their clients won't be able to attain common retirement goals. They can add value to their client relationships by helping older American workers adapt to their modest financial circumstances.

Many older Americans will need to adjust their lifestyle in one or more of these ways:

  • Spend less
  • Save more
  • Work longer
  • Stay healthy to keep working and not drain savings on medical bills
  • Make smart choices to stretch every dollar

These necessary action steps are the reality of retirement in 21st century America.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.