A. Intuitively, most people will feel that once they retire, their net income will be less. However, a report from the Employee Benefit Research Institute (EBRI), a nonprofit organization that studies retirement issues, offers some insights into just how much less it typically turns out to be. The bottom line: The more money you’re making now, the bigger the adjustment you’re likely to face.
How much money do you need to be happy?
The EBRI study looked at data for 3,358 individuals who were between the ages of 55 to 64 in 2000, and compared those people’s household income from 2000, when they were all under 65, with the same people’s income in 2010, when they’d all passed that threshold. (They excluded anybody who had income of $1 million or more in either period, since the rich are different from you and me.) Income in either group could include pensions, Social Security and earnings from work, along with other sources.
The survey found that the median post-65 household was bringing in 65.8% of the income it had been earning before 65. But when ranking income quartile, from lowest to highest, some interesting contrasts emerged. People in the lowest quartile (median pre-65 income: about $23,000 a year) actually saw their income rise after 65, by a little more than 10%. People in the next quartile up (pre-65 income: about $54,000) had about 80% as much income after 65 as they did before. But people in highest quartile, whose median income before 65 was $174,000 a year, earned only 50% as much after 65.
What caused the difference?
Most of this difference is due to two factors: First, Social Security is a major component of most retirees’ incomes, and it’s designed to be progressive, replacing a higher share of the income of lower-earning workers; and second, it takes a very big pot of retirement savings to generate more than $100,000 a year in retirement income.
Lots of other caveats apply to data like this: Many retirees, for example, simply don’t need as much income as they did during their working lives, especially if they’ve paid off their home. And those top-quartile retirees probably don’t need your pity: Their median post-65 household incomes of almost $87,000 would represent a very comfortable living in most of America.
What are the implications?
Many financial advisers argue that to be successful, a retirement-planning strategy needs to replace 70% or 80% of a family’s pre-retirement income. Studies like EBRI’s suggest that for many of the so-called mass affluent – people who make a good living, but not take-this-job-and-shove-it money—that may be an unrealistic target.
The big pragmatic questions remain:
- How much do you really need in retirement?
- What will those needs really cost?
- And, more philosophically: Will your retirement goals lead you to make sacrifices in the present that you may wind up regretting later?