Total saving & investment for retirees – dire straits or smooth sailing?

How are the majority of retirees getting by? Do they have enough in savings and investments to make ends meet or live the lifestyles they want? This is a topic I think about a lot. Being on the road full-time and living the RV lifestyle my wife and I meet a lot of retirees with all kinds of life stories. Recently I decided to take a look at these two questions and see what the numbers say.

The Employee Benefit Research Institute (EBRI) does some great research on the state of retirees. Their latest report, March 2011, can be found here. It makes for some sobering reading. The chart that caught my eye is below.

The chart shows total savings and investments for workers and retirees excluding primary residence and defined benefit (i.e. pensions) plans. The figure that stuck out to me was that 83% of retirees have less than $250,000 in savings and investments (or that only 17% have more than $250,000). The median of retirement savings is $150,000. Using the 4% safe withdrawal rate, see my previous posts on this topic if you’re not familiar with it, for these savings means that only 17% of retirees can safely withdraw $10,000 per year, or $833 per month, to pay for expenses. And only 50% of retirees can withdraw $6,000 per year, or $500 per month, safely. And maybe the scariest figure is that almost 30% of retirees have less than $1,000 in assets. At first glance this is rather shocking. Obviously, that is not enough cover most retiree’s basic lifestyles not to mention their desired lifestyles. But to get the whole picture we need to consider living expenses and other sources of income.

The primary source of income for most retirees is social security. How much does social security pay? According to the social security admin the average benefit, as of May 2011, for retired workers is $1,180 per month and $582 for spouses. That means that the average benefit for a two worker retired couple is $2,360 per month, $1,760 for a couple with one retired worker and a retired non-working spouse, and $1,180 for a single retired worker. Income for a working couple prior to retirement, in their early 60s, is significantly higher than the national median income for all persons. In 2009 it was $87,000. So, the social security benefit is in-line with providing about 40% of income prior to retirement. The other major sources of income are pensions. According the the EBRI about 50% of retirees have pensions income with the median pension income being $2,208 per month or $26,500 per year. This seems high to me but lets use those numbers.

How about living expenses? This is much harder to figure out but I can arrive at some rough estimates and ranges. The average income per household in the US is $50,000 per year. I’m using national median income for all persons because I think it gives a better indicator of what it costs to live. Taxes, social security payments, medicare taxes, etc take away about 20% of income. That leaves $40,000 per year, or $3,333 per month for expenses. Americans currently save about 5% of after tax income leaving about $3,200 for living expenses. This is roughly close to what I see in the retirees I meet on the road. Some live on much less and some off much more. Also, about half of retirees have their house paid for thus reducing their living expenses.

What does all this add up to? Well, there are a lot of variables and permutations as you can see. I took three scenarios, one for a two worker retired couple, one for a 1 worker retired couple, and one for a single retired worker. I used expenses of $3,000 per month for the retired couples and $2,000 per month for a single retiree. Also, I used the safe withdrawal for the median savings and investments of $500 per month. See the table below.

While not as catastrophic as the initial chart would indicate it is still not a great situation. In all three cases, social security income plus a safe withdrawal from savings is not enough to make ends meet for many retirees. These retirees usually end up stretching for income by withdrawing too much from their savings and taking too many investment risks, like reaching for yield. In cases where retirees have pension income its a completely different story. Those retirees usually have more than enough for retirement expenses when combined with social security income. And for the almost 30% of retirees with less than $1,000 in assets, social security is the only game in town and cutting expenses is the only answer to just make ends meet.

In summary, the financial situation for many retirees leaves a lot to be desired. Often the only solution for retirees is to stretch for income, cut living expenses dramatically, or often to continue working. And with the low savings of current workers plus the demise of pensions the outlook for future retirees is no better. But it’s not all dire straits. By adopting a flexible retirement lifestyle and learning how to invest smarter retirees can live better. I’m trying to do what I can by showing investors, in particular retirees, how to invest for income in ways not readily discussed by the mainstream and help people reach smooth sailing in retirement.