Can You Get By on the Average Retirement Income?

When planning for retirement, you need a strategy to 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.

A Useful Benchmark or Irrelevant? 

However, it doesn’t make much sense to assume the needs and goals of the average retiree household are the same as your specific needs and goals. 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.

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.
• 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 decrease your purchasing power over time and erode. Since 1925, inflation has averaged approximately 3% a year.^[i] 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. Remember—your investment time horizon can be longer than just your life expectancy. Depending on your individual circumstances, your investment time horizon could depend on other factors, such as the life expectancy of a spouse or dependents.  

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.^[ii] 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 exactly. 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 differences and circumstances define your unique needs and goals as an individual investor or retiree—something to think about if you plan on treating these figures as benchmarks.

How Will You Pay for Retirement?

Bear in mind the benefits and limitations of the more popular forms of retirement income:

• Social Security: Social Security likely has a place in your retirement income planning. But the benefits might not be enough to be your only or primary income source. Depending on your personal situation, you may receive more or less when you decide to retire and take benefits.
• Retirement Accounts: Setting money aside in an IRA or an employer-sponsored 401(k) or 403(b) can be an important step for any investor during their working years. If you are planning to use retirement accounts during retirement, consider how much you may be able to safely withdraw. Some retirees may believe it is safe to withdraw 10% per year without affecting principal, since equities have historically returned around 10%.^[iii] But returns vary year to year, and excessive withdrawals can substantially reduce the probability of maintaining your principal.
• Pensions: If your employer offers a pension, you should determine how much pension income you can expect to receive on a regular basis. Will your pension income be enough to retire on? Or will you need supplementary retirement income?
• Salary: Some retirees choose to work part-time after retirement. This may be supplementary or primary income after you retire.
• Business and Real Estate: Perhaps you have an entrepreneurial streak and start a business. Or maybe you plan to maintain an interest in an investment property. When calculating how much to expect, be aware these income sources could have more variability of return than other forms of income like Social Security or a guaranteed pension.

Average Retirement Income: Not the Best Way to Plan for Your Retirement

Many factors exist when considering planning and paying for 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.

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 are still working, you may consider ramping up retirement savings, delaying taking Social Security, reducing expenditures or continuing to work part-time for income. If you have already retired, you may consider returning to work, reducing portfolio withdrawals or downsizing your living space.

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.

^[i] Source: FactSet, as of 2/12/2018. Based on US BLS Consumer Price Index from 12/31/1925 to 12/31/2017.

^[ii] Source: US Census Bureau, 2017 American Community Survey, 1-Year Estimates. Presented in 2017 inflation-adjust dollars.

^[iii] Source: Global Financial Data, as of 1/12/2018. Based on annualized S&P 500 Total Return Index returns from 12/31/1925 to 12/31/2017.