It is no secret that the average American is financially ill-prepared for retirement.
On the one hand, this should not be surprising: The idea of retirement is almost new to humans. On the other hand, it does not change the fact that as we live longer, we have to worry about leaving the workforce for decades.
While current retirees are well aware of the importance of social security in their finances, many younger workers have no fixed Overview of how important the program is. They look at the average monthly benefit of about $ 1
However, when you compare the retirement income of most Americans, it is very important. And I have the diagram to prove it.
Some Information on Retirement Income
We come to this chart in a second, but first we have to calibrate the retirement expectations. One of the biggest misconceptions is that your expenses will rise after you claim social security. While every household has its own unique experience, by and large, that is not true.
As a proof, let's take a look at the 2016 Consumer Survey Survey of the Bureau of Labor Statistics. In the following, I have identified the five largest categories of household expenditure and how they are changing in the 20 years that lead to – including retirement.
|Category||45-54 years old||55-64 years old||65+ years old||Change with time|
|Housing||$ 22,034||$ 18,647  $ 15,866||
|Transportation||$ 10,992||$ 9,727||$ 6,814||
|Pensions / Social Security||$ 9,798  $ 7,882||$ 2,498||
|Food||$ 8,790||$ 7,273||$ 5,804||
|Health Care||$ 4,931||$ 5,513||$ 5,994||
|Total (5 Categories)||$ 56,545 [$49042||$ 36,976||(35%)|| 19659045] Data source: Bureau of Labor Statistics.
As you can see, health care costs are indeed increasing, but these increases are overshadowed by the drop in spending on all other major categories. Think about it and it makes sense:
Some may reply that these spending cuts were enforced because of a shortage of income and not the result of the election. These people might be right. But my answer would be simple: as long as basic needs are met, who cares?
We know that hedonic adaptation works both ways – that is, as long as we meet the basic needs, we can adjust our lives to less physical comfort quickly. And one study after another shows that satisfaction numbers are rising – and staying high – when people retire.
The main reason why I emphasize this is to compare the amount provided by social security.
In circles of financial planning there is an important tool, the 4% rule. In the most basic sense, it says that whatever your nest is, you can take out 4% of it in Year 1 and take out the same amount each year after that – adjustment for inflation – without having to worry about going out [19659002AccordingtoTransAmericatheaveragebabyboomerhas$164000inretirementsavings-includingIRAs401(k)sandthelikeWiththe4%rulethismeansthatthenesteggcanbesafelyretiredfor$6560ayearorabout$550amonth
This rule will be handy below if we examine the enormous importance of social security.
The declining role of pensions
According to New Retirement's annual report, the typical pension can only be $ 9,262 for private employees and up to $ 22,172 for government retirees. A January 2018 report from the Renten Rights Center estimates that 12.9% and 10.4% of all workers currently have privately funded or state pensions.
If you are among the few who receive this income, you can of course count yourself lucky. However, considering the effect of the pension on total American retirement – which affects the fact that more than 75% of current workers do not receive retirement income – the average annual pension income is only $ 3,500 per year  Using the 4% rule, this corresponds to a nest of about $ 87,500
The important graph to understand the importance of social security
In June 2018 (the last month with available data)), The typical retiree received a monthly social security benefit of $ 1,413. The typical spouse benefit was $ 737 a month. If we calculate the mix between retirees (43 million recipients) and spouses (2.4 million recipients), the typical household of retirees receives about $ 2,009 in monthly social security benefits
Again, it's easy to get those 2,000 Looking at the dollar and thinking, "That's really not much." But we need to remember what we've discussed above: you will not need nearly as much in retirement and – if you're like the American middle-class – you will not be getting more money from any other source .
To really get the point home, let's say $ 2,009 a month is $ 24,108 a year. That's nearly two-thirds of what an average retired household spends in a year.
But here's the really important part – if we consider this benefit as if it were a nest egg, it would reach nearly $ 603,000 with the 4% rule.
Let's say in perspective:
Perhaps it is not surprising then that two out of three pensioners for Social Security includes most of their income. Moreover, the program provides over 90% of the income for every third pensioner. Social security advocates also point out that the poverty rate for this population would rise from 10% today to 45% if the program disappears tomorrow.
Remember, there are definitely key pieces that are missing. Many retirees continue to work part-time, and others can rely on things like rental income. And, as I said above, if you actually receive a pension, that has a much greater impact.
But if we look at the situation from a social level, this graph proves something without a doubt: social security is enormously important, and while it may not be enough for many retirees to live alone, most would be devastated if they would disappear overnight.
This is important to us all as changes are debated to make the program sustainable. Your future retirement will undoubtedly be affected.