Do you have enough retirement income to last through your golden years? Understanding how your nest egg compares to the average retirement income can help you plan and save better, to ensure you’re comfortable, secure and happy after retirement.
Average Retirement Income: Mean vs. Median, Other Factors
Before comparing the average earnings of other retirees to your own, consider the difference between “mean” and “median” incomes:
- Mean Income – Calculated by totaling the income for a number of households and then dividing the total by that number, this is the most common measurement used to determine average incomes. However, if a few households earn a very high income, it can make the resulting average seem higher.
- Median Income – This is calculated by first arranging each household’s income in an ascending order, where the amount in the exact center of this list is taken as the average income. Calculating median incomes is often considered more effective than mean incomes, since it gives you a more realistic result.
Since median income is almost always lower than mean income for any area, this is the average that you should consider while assessing your own retirement-readiness.
Here are a couple of other factors you should take into account:
- Where You Live – Cost of living differs from place to place, so look at average retirement incomes in your zip code to understand how your nest egg compares.
- How Old You Are – The income for a household typically declines as the head of that household gets older. As a result, the average incomes also vary based on age.
→ Related reading: 5 Steps to Get Your Retirement Savings on Track
Mean and Median Incomes in 2017
The following data is the most recent one available from 2017 and compiled in 2018. So, the economic changes seen over the last year might not be necessarily represented. However, the actual numbers should be pretty close. (The data is gathered from Current Population Survey (CPS) Annual Social and Economic (ASEC) Supplement by the US Census Bureau).
- $73,645 (median) and $103,423 (mean) for household heads between 55 and 59 years of age
- $63,919 (median) and $89,882 (mean) for household heads between 60 and 64 years of age
- $54,124 (median) and $79,772 (mean) for household heads between 65 and 69 years of age
- $46,797 (median) and $68,052 (mean) for household heads between 70 and 74 years of age
10 Common Sources of Income During Retirement
Most retired individuals receive income from one or more of the following sources:
1. Social Security
For most Americans, Social Security continues to remain a reliable and vital source of retirement income as, unlike most other income sources Social Security benefits are adjusted at regular intervals for inflation. Nearly 30% of Americans still consider Social Security to be a major source of their retirement income and this stat has remained reasonably stable all through the past decade.
2. Work Income
The second most reliable and certain source of retirement income is work income. Also, due to the decline in other retirement investments, Americans are now delaying their retirement or taking up part-time work during their retirement years. Around 22% of Americans in their retirement age are working part-time and this number has nearly doubled since 2001 when only 10% of Americans were working even after their official retirement.
3. Asset Income
A rental property or royalties from a book are two income-producing assets that can generate income even after an individual has retired from the workforce. About 6% of Americans rely on retirement income from royalties and leased properties.
→ Related reading: 11 Ways to Invest in Real Estate (With or Without Buying Property)
4. Pension Plans and Government Sources
Some Americans are fortunate to receive pension during retirement. Down from 34 percent in 2001, today around 24 percent of Americans rely on an employer-sponsored plan to survive through the retirement years. According to Gallup, this is the lowest level recorded in years of doing this survey.
Retired military service members and government employees may receive pension after a predetermined period of 20 or 30 years. This pension is automatically adjusted according to the cost of the living index.
5. Reverse Mortgages
Americans who are 62 years or older and living on a fixed income may also receive income from a reverse mortgage which is legitimately known as home equity conversion mortgage. This allows the homeowner to take the proceeds either as regular payments or as a lump sum. There is no income tax on the money received but since it is a debt, it needs to be repaid to the mortgage lender when the property is sold.
Americans are also investing in individual stocks or stock mutual funds to generate income during retirement. Around 17% of Americans are relying on mutual funds and stocks but that number has declined over the years due to the risk factor involved.
→ Related reading: Living Off Dividends
7. Home Equity
For many Americans, the biggest asset is their home. However, just a quarter of the respondents who were surveyed intend to tap into their home equity to fund their retirement.
The TaxPayer Act of 1997 allows homeowners to sell their home and receive tax-free gains of up to $250,000 for those who are single and up to $500,000 for those who are married.
Somewhere around 7% of Americans are relying on an insurance product or an annuity to fund their retirement, and this percentage has remained steady over the years.
Only 7% of Americans plan to rely on their wealthy ancestors or relatives to help finance their retirement and expect to receive a legacy that is adequate to help them sail through their retirement years.
10. Defined Retirement Contribution Plans
Many American employers put money into defined contribution plans like 401(k)s, 403(b)s and 457s to generate a steady source of income during retirement. Other plans where employees defer a part of their income into their retirement reserve include SEP IRAs, traditional IRAs, and traditional 401(k) plans. This has become the primary source of income retirement with some 42% of Americans relying on these tax-deferred accounts to support their retirement years.
The most important feature of these defined contribution plans is that they can be rolled over to the new employer’s plan with every job switch. This builds the retirement reserve over time which keeps growing until retirement.
Will Your Retirement Savings Be Enough?
Here are some strategies to help you boost your retirement savings:
- Set specific retirement goals, and work with an advisor to create a financial plan that will help you meet them.
- Stick to the spending and income plan you’ve created, so you can maximize your retirement savings.
- Start contributing to a 401k or IRA early, and max out your annual contributions while you’re still earning.
- Use a self-directed IRA to choose where your savings are invested and gain more control over your portfolio.
- After the age of 50, use catch-up contributions to your benefit. These let you save up to $6,000 more every year.
Your income will reduce after retirement, so save and invest in your nest egg now if you don’t want to end up working all your life. Take the time to compare your investment options and consider the fees and the ongoing expenses after opening the account. Also be wary of sales pitches that sound profitable but come with hidden costs and fees for opening, maintaining, and closing accounts associated with certain investment products.