Average Retirement Income
When planning for retirement, you need a strategy to help support the life you envision. This strategy should take into account your retirement income needs and any goals you aim to pursue. Given the personalized nature of your needs and goals, is the average retirement income relevant to your planning?
What is Average Retirement Income?
Some investors may look to the average retirement income as a goal for their retirement strategy. These average retirement income figures can vary based on the cost of living in specific regions, and may initially seem to be a useful piece of information during your retirement planning.
While discussing the average retirement income with your financial advisor may be a good place to start before you reach retirement, there are other factors to consider that may change your perspective on whether the average income for retirees is enough for you long-term.
A Useful Benchmark or Irrelevant?
You may have vastly different needs and goals when you retire than the average retiree. Even if your circumstances are similar to the average retiree, individual differences may mean you need to take a different planning approach.
Instead of planning your retirement around a median or an average household income figure, it might be more prudent instead to start your planning process using your own current personal retirement savings and anticipated spending for your particular needs and goals. You likely vary in at least one way from a person of average retirement age, average retirement income, average social security benefits, etc.
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How Much Will You Need in Retirement?
What are your retirement goals? Do you plan on maintaining your current lifestyle, or do you want to enhance it? Retirement goals can differ significantly, but they all come with costs.
Retirement expenses fall into two categories: non-discretionary and discretionary:
- Non-Discretionary Expenses include certain needs and associated costs that are essential. Payments for basic living expenses, healthcare, insurance, debt and taxes fall into this category. Generally these costs are unavoidable, and with the exception of healthcare, are more likely to be fixed over time.
- Discretionary Expenses are more flexible, as they reflect wants instead of needs. Nevertheless, they may represent important lifestyle enhancements or goals. The good news is you should be able to dial back your discretionary spending if necessary. But estimating the discretionary funds you might want after you retire and beginning saving now is usually a good start.
Once you figure out how much you might need during retirement to cover your non-discretionary and discretionary expenditures, don’t forget to factor in the impact of inflation as well as your time investment horizon when determining your longer-term income and cash flow needs:
- Inflation can erode your purchasing power over time. Since 1925, inflation has averaged approximately 3% a year.1 So if you require $50,000 to cover annual living expenses, you would need almost $90,000 in 20 years just to maintain the same purchasing power, should the average inflation rate continue.
- Investment Time Horizon is another important factor when planning for retirement. Your lifespan could potentially last significantly longer than previous generations, meaning your savings need to provide for longer after you retire. Additionally, your investment time horizon may extend beyond your life expectancy if you have a younger spouse or wish to leave a legacy for family members or charity.
Does the Median Household Income Reflect Your Needs?
According to data from the US Census Bureau’s 2017 American Community Survey, the median total household retirement income in the US for households with a head of household over age 65 is $43,735.2 Exhibit 1 breaks down this median total household income data by state.
Exhibit 1: Median Total Household Income with Heads of Household 65 years and older
Source: US Census Bureau, 2017 American Community Survey 1-Year Estimates. Presented in 2017 inflation-adjusted dollars.
But do any of the median incomes match your specific income needs? They might, but probably not. Do the median incomes take into account the longer-term effects of inflation? They don’t. Do they bear any relation to your personal time horizon or lifespan? No. They aren’t designed to be specific or forward-looking. The data simply presents an informative snapshot of median household income data, it is not meant to be a recommendation or goal for any specific retiree.
Your personal circumstances define your unique needs and goals as a retiree—something to think about if you plan on treating these figures as benchmarks.
Average Retirement Income: Not the Best Way to Plan for Your Retirement
The average retirement income may hold little relevance for your personal situation, needs and goals.
Rather, your personal situation is likely defined by variables specific to you, including your retirement needs and wants (travel, hobbies, etc.), your rate of savings and any dependents who rely on you.
Furthermore, a national or state average doesn’t anticipate the changes likely to occur throughout retirement—the need to increase or decrease withdrawals, or unexpected health changes and expenses which may affect your income needs.
Hence, planning for the average retirement income or using it to project your retirement income needs is probably not the best strategy. After all, you’re not average—a personalized plan is more likely to keep you comfortable in your retirement years.
Are You on Track to Enjoy a Comfortable Retirement?
With careful planning, you may be able to achieve the retirement lifestyle you envision.
If you aren’t sure how to proceed or need help getting started with your retirement plan, speak with a financial adviser at Fisher Investments to learn more about planning for retirement.