Have You Calculated Your Retirement Need?
A rule-of-thumb that many have used to plan for retirement is that an individual or family will need 70% of their pre-retirement income to sustain the quality of life in their retirement years. That was the conclusion of The Center for Retirement Research at Boston College as they sought a proper income replacement amount.1 Barry S. Warner, CEO of Informed Family Financial Services, agreed on this general rule, adding that the necessary replacement percentage may be as high as 80%.2
These figures may or may not be reliable for you as you plan for retirement. They may be accurate for those who have little or no diminishment of personal consumption. For others who have paid off their mortgage, whose children require little or no financial assistance, and who have no travel plans, the percentage may decrease ever so slightly. However, some plan to include sizable domestic and international travel plans, or complete the long anticipated Ph.D. in their golden years. The latter may need to continue earning the same amount after leaving the workforce.
In reality, everyone will have significant swings in annual retirement income needs. The first five years may be filled with long anticipated travel. Quite often, that is followed by a slight dip in financial needs as retirees settle into the enjoyment of the hobbies and friendships of a more local nature. Ultimately, there will be an increase in medical costs incurred as we continue through the aging process.
How Much of Your Income Will be Provided by Social Security?
Social Security is undoubtedly a significant element for most in their retirement. According to the Social Security Administration, very close to one half of married couples rely upon this government safety-net for at least fifty percent of their retirement income. Research by the Nationwide Retirement Institute agrees with this general assessment, placing the amount at a marginally higher 57%. More than one of every five Americans depend upon it to provide NINETY percent or more of their funds!3
Another question that must be answered is, “How much of the anticipated income will Social Security actually provide?” An alarming number of the American population have no idea that Medicare, and other expenses, will be deducted from monthly benefit payments.4 Probably fewer still understand the risk being faced of future benefit reductions.
If Social Security were started today with the same actuarial assumptions used in 1935, benefits would not begin until the age of 84! With only 3 workers supporting one retiree benefits today, the financial footing of the system is steadily deteriorating. Charles Thorngren has stated, “Social Security was meant to be an aid for those who could not work due to disability or retired. It was never designed to be the entire means to provide for oneself.”5
While there seems to be no will to address the looming shortfall, this political can will soon refuse to be kicked further down the road. A reduction of benefits will occur in only 17 years without structural changes in taxation. A shrinking Social Security benefit will leave a significant percentage of the growing American retired population with a painful income shortfall. This is a reality for which it appears to be totally unprepared.
Next week, we will look at some of the more popular retirement saving vehicles for ministry, mission, & nonprofit personnel and how they fit into the picture.
1 Parker, Tim. Retirement: What Percentage of Salary to Save? Investopedia. June 21, 2017
2 LaMartina, David. The Role of Social Security in Your Client’s Portfolios. ThinkAdvisor. September 13, 2017
3 LaMartina, ibid.
4 LaMartina, ibid.
5 Carosa, Chris. Social Security – A Promise Breaking? Fiduciary News. September 12, 2017.