The Most Important Social Security Chart You’ll Ever See
On the one hand, that shouldn't be too surprising: the very idea of retirement is almost brand new to humans. On the other hand, it doesn't change the fact that as we're living longer lives, we'll need to provide for ourselves for decades after exiting the workforce.
Image source: Getty Images.
While current retirees are well aware of how important
When put in perspective of most Americans' retirement income, however, it is enormously important. And I've got the graph to prove it.
Some information about income in retirement
We'll get to that graph in a second, but first we need to calibrate expectations for retirement. One of the biggest misconceptions out there is that your spending will go up after you claim
For proof, let's look at the 2016
Category 45-54 Years Old 55-64 Years Old 65+ Years Old Change Over Time
Housing
(28%)
Transportation
(38%)
Pensions/
(74%)
Food
(34%)
Healthcare
22%
Total (5 categories)
Data source:
As you can see, while healthcare costs do, in fact, increase, those increases are dwarfed by falls in spending on all other major categories. Think about it for a minute and it all makes sense:
* Many have paid off their mortgage by the time they retire -- or downsize to a smaller house.
* Not having to drive to work anymore cuts down drastically on transportation costs.
* Retired couples often have fewer mouths to feed and have the time to cook at home.
* No longer is such a large cut of income being taken out to pay for
Some might retort that these spending reductions are forced because of a lack of income and not the result of choice. Those people might be right. But my response would be simple: As long as basic needs are being met, who cares?
We know that hedonic adaptation works both ways -- meaning that as long as basic needs are met, we can adjust to fewer physical comforts in our life quickly. And study after study shows that levels of contentment spike -- and stay high -- once people enter retirement.
The main reason I highlight this is to put the amount that
Using the 4% rule
In financial planning circles, there's an all-important tool called the 4% rule. In the most basic sense, it states that whatever your nest egg is, you can take out 4% of it in year one and take out the same amount every year thereafter -- adjusting for inflation -- without having to worry about running out of money.
According to TransAmerica, the median baby boomer has retirement assets -- including IRAs, 401(k)s, and the like -- of
This rule will come in handy below when we examine the massive importance of
The declining role of pensions
According to New Retirement's annual report, the typical pension can be worth as little as
Obviously, if you are one of the few who gets this income, you can count yourself lucky. But if we look at the pension's effect on American retirement as a whole -- which factors in the reality that more than 75% of current workers will not receive pension income -- the average annual pension income comes out to just
Using the 4% rule, this is equivalent to a nest egg of about
The vital graph to understand
In
Again, it's easy to look at that
To really drive the point home, let's consider that
But here's the really important part -- if we viewed this benefit as if it were a nest egg, using the 4% rule, it would come out to almost
Let's put that in perspective:
Calculations by author.
Perhaps, then, it's not surprising that two of every three retirees count of
Keep in mind, there are definitely key pieces missing. Many retirees continue to do part-time work, and others can count on things like rental real estate for income. And, as I stated above, if you actually do get a pension, it has a much bigger effect.
But if we back up to look at the situation from a societal level, this chart proves something beyond a shadow of a doubt:
That's important for all of us to remember as changes are debated to make the program sustainable moving forward. Your future retirement will no doubt be affected.
The
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "
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