Patinelli & Chang, LLP

What has the Average American Saved for Retirement?

What is the size of the average retirement nest egg? It depends on what you mean by ‘average.’"

It’s the question we all wonder about, but not very many of us will come out and ask. A 2019 analysis of more than 30 million retirement accounts by Fidelity Investments found that the average balance in corporate sponsored 401(k) plans at the end of 2018 was $95,600. When it came to traditional, Roth and rollover IRAs, the number was $98,400, reports Investopedia in a recent article titled “What Is the Size of the Average Retirement Nest Egg?” A look at 403(b) and other defined contribution retirement plans in the non-profit sector found that it was $78,7000. These numbers were down between 7.8%-8% from the same quarter of the prior year. Blame the stock market for that.

Averages like this only indicate a few things. Younger workers, for example, tend to have less in their retirement accounts than older workers. Their salaries are smaller, and they haven’t had decades to accumulate tax deferred income in their accounts. However, that gap is wide.

A June 2018 report from the Transamerica Center for Retirement Studies looked at a nationally representative sample of more than 6,000 workers and broke out retirement savings by generation. The boomer members had estimated median retirement savings of $164,000 in 2017, while Gen Xers had $72,000 and millennials had $37,000.

Aside from age, the big factors in retirement savings success seem to be education and income. People with higher income put more money into their retirement accounts. The Transamerica study shows that households with incomes of under $50,000 had estimated median retirement savings of $11,000. Households with incomes between $50,000 and $99,999 had median savings of $61,000 and those with incomes of $100,000 or more had $215,000.

The higher the level of education, the more money people have set aside for retirement.

Therefore, if you’re wondering how your nest egg compares to the average nest egg, the first thing you’ll want to do is decide to whom you want to compare yourself and your nest egg. You can compare yourself to the U.S. population in general, or to people who are more like you in education, age and income.

Here’s an unnerving thought: no matter if your nest egg is way above your peer group, that doesn’t mean it will be enough when retirement rolls around. Everyone’s situation is different, and life hands us unexpected surprises.

One way to prepare is to have an estate plan. If you don’t already have an estate plan, which includes a will, power of attorney, health care power of attorney, possibly trusts and other strategic tools for tax planning and wealth transfer, make an appointment with an estate planning attorney.

Reference: Investopedia (Sep. 24, 2019) “What Is the Size of the Average Retirement Nest Egg?”

How to Live a Full Life throughout Retirement

“During retirement or before, you probably did all the financial planning along with the legal paperwork. Have you also thought about personal choices as you age and the options ahead?”

If you don’t have a personal plan for yourself, you may wish you had given it some thought, if you come to an age and stage where other people want to make decisions on your behalf. There are many choices to be made before, during and after retirement, but without a clear picture of what you want, it’s easy to get sidetracked. This message from The Press-Enterprise is very clear in the article “Aging seniors: Make decisions before someone makes them for you.”

Here are some of the choices you’ll face:

Where to live. Waiting to move to a location you want to live in early on, could make it difficult or impossible for you to move there. Do you want to stay in an area where you have friends and belong to social and civic circles?

Do you want to relocate to live closer to family members? What will you do if you move and then learn that your family’s life is busy, and you don’t see them very often? Be prepared for that scenario.

What do you like to do? If you visited Arizona or Texas and loved those places, do you want to move there for recreational activities or climate? If you have more time for hobbies and interests, you may be able to fulfill those dreams.

Moving also needs to take into account taxes, sales taxes, inheritance taxes and property taxes.

What kind of living space do you want? If you prefer to live in your own home, that raises questions. Will the house be safe as you age? Does the home have stairs? Are the hallways wide enough for a wheelchair? Do you have enough assets to support the house’s upkeep, make repairs and any major fixes? Will you take care of the house, or have to hire someone to maintain it? Finally, if you live with a spouse or a partner and that person dies, will you be able to manage the house on your own?

If a personal plan isn’t made now, you might regret it when other people are making choices for you.

Do you have a transportation plan? At some point, you will likely have to give up the keys to the car. How will you get around? If you live in a place with adequate buses, subways or taxis, you’ll be able to remain independent.

Taking care of yourself. The idea of not being able to take care of ourselves, is not a happy one. At some point in life we have to accept the fact that we’ll need care. As we age, it takes an effort to enjoy socialization and meals and planned activities become very important. Does that include adult day care, a Continuing Care Retirement Community or assisted living?

Don’t be afraid to look into the future. By thinking about what you want and planning in advance, you are more likely to enjoy your retirement life.

Reference: The Press Enterprise (Aug. 31, 2019) “Aging seniors: Make decisions before someone makes them for you.”

When You Might Want to Take Social Security Early

“Although it’s common to point out why it might make sense to delay taking Social Security benefits, there are legitimate reasons for some people to claim their benefits sooner rather than later.”

Most people decide to start receiving Social Security benefits when they turn 62, or when they stop working, if they’re older than 62. Social Security’s own statistics show that 70% of the 42.4 million retirees get reduced benefits, because of taking them before their full retirement age, according to a recent article aptly titled “Why You Might Want to Take Social Security Early” from Government Executive. While there are plenty of reasons to take Social Security as late as possible—as late as 70—there are also reasons why it makes sense to take it earlier.

The biggest one, is if you can’t afford to retire without claiming your benefit. There’s no need to sacrifice your financial security early on in the hope that you’ll get a big payout later in life. However, you should do those calculations carefully. A Social Security benefit along with other retirement sources, like a federal retirement benefit for federal employees, might provide adequate income. Just make sure that you’re balancing all the funds you are withdrawing and be mindful of taxes on those withdrawals.

Social Security benefits are a little more tax-friendly than withdrawals from traditional retirement savings. Delaying Social Security and increasing the withdrawals from retirement savings a little between the ages of 62 and 70 might lead to lower tax bills in your later years.

Another reason to take your benefits early, is to help family members receive benefits based on your work record. A spouse or child could receive a monthly benefit of up to half of your full retirement benefit, if they qualify. If your spouse does not have an earned Social Security benefit of their own, or if their benefit is smaller than half of yours, it may be helpful for you to claim early.

The Social Security Administration reports that of the 25 million women age 65 or older who were receiving benefits as of December 2017, 52.2% of them were entitled solely to a retired-worker benefit. About 26.5% were entitled to both a retired-worker benefit and a wife’s or widow’s benefit, and about 21% were receiving wife’s or widow’s benefits only.

Note that payments to your family do not decrease your own retirement benefit. The value of the benefits your family may receive, when added to your own benefits, may help you decide that filing early for benefits will be better.

A widow or former spouse can explore what benefits their deceased or ex-spouse has earned. In some cases, you may be able to apply for retirement or survivors benefits now and switch to a higher benefit later. If you are already receiving retirement benefits, you can only apply for benefits as a widow or widower, if the retirement benefit you receive is less than the benefits you would receive as a surviving spouse.

If you were born before January 2, 1954 and have already reached full retirement age, you have the choice of receiving only your current or divorced spouse’s benefit and delay claiming your own retirement benefit. If you were born after that, the option to take only one benefit at full retirement age is no longer available. Therefore, if you file for one benefit, you will effectively be filing for all retirement or spousal benefits.

Reference: Government Executive (July 18, 2019) “Why You Might Want to Take Social Security Early”

Will You Return to the Work World in Retirement?

“Perhaps they started saving too late, or they ran into a financial or career setback. That’s one reason why more people are working after they retire.”

Retirement income is often described as a three-legged stool, with money coming from three different sources: retirement savings accounts, other investment accounts and Social Security. However, as reported by the New Hampshire Register in the article “Returning to work after you retire,” often that’s not enough income to provide a comfortable retirement. For some people, work is an enjoyable and fulfilling experience and they see no reason to retire. Others feel their identity is wrapped up in what they do, so they keep working.

A study from the Employee Benefit Research Institute found that almost half of Americans expect to work past age 65. However, that doesn’t always work out for everyone.

Many people become unable to work before they retire, due to illness or an injury. Others lose their job in their early 60s and have problems finding a new position with the same level of salary.

Even if you can work after retiring, there are several factors to consider. If you claim Social Security benefits before reaching Full Retirement Age (FRA) and then return to work, the IRS will deduct money from your Social Security benefits, if you earn above a certain amount. In 2019, that number stands at $17,640. You’ll lose $1 in benefits for every $2 you earn above that threshold, which changes every year, until you reach FRA.

For the year you reach FRA, that threshold takes a leap, to $46,920 in 2019, and then $1 is deducted for every $3 over the threshold, but just for that year. Once you finally do reach FRA, there is no limit to what you may earn.

For some people, retirement is the time to strike out in a new direction. It could be one they have wanted to explore for years but were limited by a need to pay a mortgage, put children through college, etc. For others, working part time is a way to ease into retirement, while still bringing in some income.

If you intend to work again after retirement, start by clarifying exactly why you want to do so. For instance, if you love your profession and would prefer to remain in it, maybe a consulting position with a prior employer would be enough to keep yourself in a field you love, while giving you more leisure time.

For someone who wants to become active in their community, working at a nonprofit organization that serves a cause or a group that you believe in could give you a fulfilling and productive role.

For those who like to travel, consider a new occupation. A teacher who retired early became a stewardess on an airline, because she wanted to visit a daughter who was going to college in Australia.

It’s okay to want to work up to or long past your retirement. A recent television news segment featured a gentleman who was well into his late 90s, who worked four hours a week at a local supermarket, bagging groceries.

Reference: New Haven Register (July 7, 2019) “Returning to work after you retire”

Retirement-Age Workers Crack the 20% Mark

“Rickety social safety nets, inadequate retirement savings plans and sky-high health-care costs are all conspiring to make the concept of leaving the workforce something to be more feared than desired.”

At some point last century, single income families vanished.  It now seems the idea of Americans being able to retire after age 65 may be headed in the same direction. For the first time in 57 years, the participation rate in the work world of people of retirement age has gone to more than 20%, says Crain’s New York Business in the article “America’s elderly are twice as likely to work now than in 1985.”

As of February 2019, the ranks of people who are 65 and older who are either employed or seeking employment has doubled from a low of 10% in 1985. The biggest group of older workers? Those who have a college degree. The share of employees age 65 and older with at least an undergraduate degree is now at 53%, up from 25% in 1985.

The dramatic increase has pushed the demographics inflation-adjusted income to an average of $78,000, which is 63% higher than what older workers earned in 1985. By comparison, American workers below age 65 saw their average income increase only by 38% over the same period.

A study by United Income, which drew on data from the Census Bureau and the Bureau of Labor Statistics, shows a mismatch between older workers who need the money the most and those who are college educated and still working.

The wealthier, college-educated workers who are in better health are working, but the less-educated workers are more in need of the income.

The Bureau of Labor Statistics expects the aging baby boomers to continue to represent the strongest growth in the labor force participation through 2024. At that point, they’ll be between 60–78. Many will likely continue to work, even after starting to receive Social Security benefits.

The outlook for retirement for all Americans is not great. Most people will need at least 80% of their pre-retirement income to maintain their lifestyles, when they stop working. Social Security only covers about 40-50%. The typical worker on the bottom half of the income distribution has no retirement savings and is completely dependent upon Social Security.

People in the middle range have a median of $60,000 saved, so they are not really prepared for retirement either.

The top 10% of earners have a median amount of $200,000 saved. While this number does not include real estate or other tangible assets (and it does not include any potential inheritances), they aren’t fully ready either.

With most experts recommending people have at least $1-2 million saved to retire comfortably, it’s no wonder that most Americans will be working well into their so-called “golden years.”

Reference: Crain’s New York Business (April 22, 2019) “America’s elderly are twice as likely to work now than in 1985”

The Top Three and Bottom Three States for Retirees

“There are a number of reasons why people approaching retirement might want to relocate. Chief among them is the need to stretch their savings and their Social Security checks.”

New Mexico, “The Land of Enchantment” state, is seeing an influx of retirees, which is the same reason people are moving to Florida and Arizona. They’re fleeing New Jersey, Maine, and Connecticut, according to a survey from the moving company United Van Lines. The company asked 26,998 of its customers who moved from Jan. 1, 2018 to Nov. 30, 2018 why they were moving and where.

According to CNBC’s article “Retirees are flocking to these 3 states—and fleeing these 3 states in droves,” four out of 10 people who moved to New Mexico said it was for retirement.

New Mexico seems to be taking over the lead from Florida, when it comes to retirement. Florida was second, followed by Arizona, and the cost of living is a key factor. After examining the cost of housing, medical expenses and income taxes, retirees or soon-to-be retirees are making their plans.

Another important factor is how states treat Social Security income. There are still states that tax Social Security, which is a big turn off for retirees. Those states are: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, and Vermont.

New Jersey is experiencing a big outflow of residents. It has the highest effective property tax in the country: 2.13%, according to the Tax Foundation. It also has a top individual income tax rate of 10.75%, applicable to income exceeding $5 million.

Affordability is a significant factor in retirement relocation, but there are other factors to consider, including:

Family and friends. If you can afford to stay where all your family and friends are, isn’t that worth a “friends and family” tax? Who will be on your emergency contact list in a new home town? Will you make a new network of friends to serve as your retirement family?

Know before you go. Get to know the area before buying anything. If you can, rent for a six-month or one-year period. You should also go off-season, if retirement has you considering an area with a high number of tourists. A busy beach community that becomes a deserted island may not be as much fun as when the crowds all leave — or it may be better. Live there before committing permanently.

Call your financial advisor. Don’t go anywhere, until doing a comprehensive analysis of the costs of the move and the new location’s cost of living. What does an active lifestyle cost in a new town? Just as important, what would it cost if you or a spouse become seriously ill in the new home? Is there quality health care nearby, or would you have to return home for any kind of serious medical care?

Call your estate planning attorney. If your plans include moving to a state far from family and friends, you’ll need to be sure that all estate planning documents are up to date. You’ll also need to have your current estate plan reviewed to make sure it will be valid in your new home state.

Reference: CNBC (April 17, 2019) “Retirees are flocking to these 3 states—and fleeing these 3 states in droves”

Want Guaranteed Income, while Putting Off Benefits?

“In some situations, financial advisors will shift some of a client’s assets to a single premium immediate annuity, so they can put off tapping Social Security.”

It’s a conflict faced by pre-retirees: they are still working full time, but that’s going to end soon. They will need income, but they want to delay taking their Social Security benefits for as long as possible. There are assets in place, but what about volatile markets? One option is to look to the world of annuities, says CNBC’s article “Here’s one way to get guaranteed income while delaying Social Security.”

If assets are available, some financial advisors recommend that rather than taking gradual amounts out of retirement accounts, including IRAs, 401(k)s, pensions, savings, etc., the money be used to purchase a single premium immediate annuity, also known as a SPIA.

Annuities offer guaranteed income, either for a set time period or for life, vary widely in their features and can be tricky to understand. They’re also expensive. Annuities are also polarizing — people either hate them or they love them.

SPIAs are a bit more straightforward than other annuities. They make up only a fraction of annuities sold every year, $9.7 billion versus $233.7 billion last year, as reported by the LIMRA Secure Retirement Institute.

The SPIA may be part of the retirement income puzzle, but there are cautions from financial advisors. For one thing, it’s a place to secure a payout over a period of time and not a tool for asset growth.

In exchange for guaranteed income over a set period of time, which could be for the rest of your life, you hand over a lump sum to an insurance company. There’s no set up fee, and it comes with no annual expenses. However, once the transaction is done, you can’t get your money back. You have an income stream, but that’s it. If you or a family member have an emergency, you have no flexibility to get that money back. There are rare exceptions, where insurance companies allow for a limited emergency withdrawal.

The annuity’s income is taxed. Therefore, if you use the money from a tax-deferred account, like an IRA or 401(k), you’ll pay taxes on the income as you receive it over the life of the annuity. If the funding comes from sources that are not tax advantaged, you’ll pay taxes only on the portion of the SPIA that was not taxed through what the insurance company calls an exclusion. Don’t forget that liquidating funds from a brokerage account will generate tax liabilities.

Some financial advisors recommend going with an old-school Certificate of Deposit (CD) instead, or U.S. Treasury bonds, which are backed by the government. The yields are low, but they are secure.

Who is the best candidate for a SPIA? It is for someone who simply cannot manage their money and are best having it be given to them in a highly controlled monthly fashion. In this way, it can protect some people from themselves in retirement.

Reference: CNBC (April 4, 2019) “Here’s one way to get guaranteed income while delaying Social Security”

The Big Eight: Don’t Risk Your Retirement with These Mistakes

“A big part of generating enough income to live off of in retirement, is identifying and mitigating risks to that income stream. Bear markets, interest rates and inflation can all wreak havoc on retirement income. Physical and mental wellness, along with personal disposition and behavior patterns, also impact retirees’ financial decisions.”

During our working lives, we have a cash flow called a “paycheck” that we rely on. A similar cash flow occurs when we retire and start the process of “deaccumulation” or creating income streams from sources that include our retirement funds. However, generating enough income to enjoy a comfortable retirement requires managing that cash flow successfully, says CNBC.com in the article “Here are 8 costly retirement mistakes to avoid.”

Preparing for the risk of a bear market. If markets take a nosedive the year you retire and you stick with your plan to withdraw four percent from your portfolio, your plan is no longer sustainable. Better: have an emergency fund in place, so you don’t have to tap investment accounts until the market recovers.

Investing with inflation in mind. We have been in such a low inflation environment for so long, that many have forgotten how devastating this can be to retirement portfolios. You may want to have some of your money in the market, so you can continue to get rates above any inflation. If inflation runs about 3.5% annually, a moderate portfolio returning 6% or 7% keeps up with inflation, even after withdrawals.

Be ready for longevity. Worries about outliving retirement savings are due to a longer overall life expectancy. There’s a good chance that many people alive today, will make it to 95. One strong tactic is to delay taking Social Security benefits until age 70, to maximize the monthly benefit.

What about interest rates and inadequate returns on safer investments? This is a tricky one, requiring a balance between each person’s comfort zone and the need to grow investments. Current fixed-income returns lag behind historical performance. Some experts recommend that their clients look into high-dividend stocks, as an alternative to bond yields.

Prepare NOT to dump stocks in a temporary downturn. Without strong stomachs and wise counsel, individual investors have a long history of dumping stocks when markets turn down, amplifying losses. We are emotional about our money, which is the worst way to invest. Try working with a financial advisor to remove the emotion from your investments.

Don’t withdraw too much too soon. It looks like a lot of money, doesn’t it? However, even 4% may be too much to take out from your investments and retirement accounts. It all depends upon what other sources of income you have and how markets perform. Be careful, unless going back to work in your seventies is on your bucket list.

Prepare for cognitive decline. This is way harder to conceive of than inflationary risks, but it becomes a real risk as we age. Even a modest level of age-related cognitive impairment, can make managing investments a challenge. Have a discussion with family members, your estate planning attorney and a financial advisor about deciding who will manage your investments, when you are no longer able.

Are you ready for health care costs? If at all possible, wait until 65 to retire, so you will be eligible for Medicare. Even when you have this coverage in place, there may still be considerable expenses that are not covered by Medicare. If you don’t have long-term care insurance, get it as soon as possible.

Reference: CNBC.com (March 5, 2019) “Here are 8 costly retirement mistakes to avoid.”

Three Factors to Consider, When Deciding When to Claim Social Security Benefits

“Chances are, Social Security will constitute a major income source for you in retirement, which is why the decision to file shouldn't be taken lightly.’

There’s an eight year window to file for Social Security, starting when you celebrate your 62^nd birthday and ending when you celebrate your 70^th birthday, says the Independent Record in a useful article titled “These 3 Factors Should Influence When You File for Social Security.” You can file early, but that puts a dent in the size of your benefits. Wait until 70, and your benefits will hit their highest level.

What’s in the middle of 62 and 70? Full Retirement Age (FRA), which is the age at which you’re entitled to receive the full monthly benefit, based on your earnings history. That age depends upon what year you were born.

What usually happens, is that people start taking their benefits early. For every month ahead of your FRA that you take benefits, your monthly benefit will shrink. Claim at age 62 when your FRA is 67, and you’ll take a 30% hit. However, if you can wait, you’ll receive “delayed retirement credits” that increase benefits by 8% up to age 70. By waiting, you can boost your Social Security benefits by 24%.

Keep these factors in mind, when deciding when to claim your benefits:

Your earnings. You can keep working and receive Social Security benefits. However, unless you’ve reached FRA, doing this will cut your benefits in not one, but two ways. First, you’ll get a reduction because you filed before your FRA. Next, if your earnings exceed a certain level, a portion of your benefits will be withheld. However, it’s not permanent because they’ll be added back into your monthly payments, once you reach FRA. That is if you earn more than $17,640. If you reach FRA later in the year, that earnings limit can go as high as $46,920. If you can wait, it may be best to keep getting your paycheck and letting those benefits grow.

Your savings. Social Security was never intended to be a middle-class retirement plan. It was originally designed to protect the most vulnerable Americans — those who were infirm or elderly — from dire poverty. However, as a nation, we’re not great at saving for retirement. Therefore, Social Security plays a big part in most people’s retirement income. The more you’re going to depend on Social Security to fund your retirement, the longer you should wait to file for benefits.

Your health. This is the great unknown. We simply can’t know how long we are going to live, whether our health is good or bad. Social Security is designed to pay the same total lifetime benefit, regardless of when you file. Say that your FRA is 67, but you file at age 62. You are reducing your monthly benefits by 30%, but you’re collecting 60 more benefit payments during your life. The catch is, you need to live an average life for the formula to work. If you die earlier, you’ve lost money by waiting to file. If you pass away later than the average senior, then you’ll have maxed out your Social Security benefits.

Evaluate all three of these factors to the best of your ability. You should also consider your lifestyle and spending habits. There is no one right answer. However, making the right choice could have a significant impact.

Reference: Independent Record (Feb. 2, 2019) “These 3 Factors Should Influence When You File for Social Security”

Why You Need More Than One Bucket for Retirement

“Even though this couple had never lived extravagantly, they cut their expenses again and again—finally to the bone—but still could not make ends meet.”

An 80-year-old man shares his experience and hard lessons about retirement income in this article from the Canton Citizen “Smart About Money: Retirement Lessons.” The story begins when he retired from a mid-sized company with a “guaranteed pension.” The pension may have been guaranteed, but what was not guaranteed was the amount of his monthly payments. They were cut, several times.

He and his wife were receiving about a third of what they had counted on receiving, which created a financial hardship they never anticipated. They did what they could with their budget, but had to tap their savings, which were nearly gone.

Friends suggested a reverse mortgage, but they were reluctant to do so. Their home was the only asset, and they didn’t want to find themselves with nothing.

Their regrets?

The man wished he had gotten a part-time job after retirement. They could have lived frugally on this income and let his pension continue to grow. They were considering, even at this late stage in their lives, getting part-time work just to give themselves a few hundred dollars a month, in addition to their Social Security income.

He also wished he had never trusted his pension “guarantee.” He wished that he had multiple income buckets for retirement. A pension and Social Security are two buckets, but a third and a fourth would have given them more income, which as it turned out, they desperately needed.

Finally, he said that he wished he and his wife had devoted more time to planning for their retirement years to last far longer than they had anticipated. They are both likely to live into their 90s, or even to 100. They had no idea they would need income for a three- or four-decade retirement.

There are no guarantees in retirement planning but having multiple sources of income makes it far more likely that your retirement income will be enough to live on, and hopefully enough to enjoy the things you want to do during retirement.

Social Security is not a guarantee, although it has been dependable in the past. It is possible that this government agency will face challenges in the future. Fewer and fewer workers have pensions of any kind. Instead, we rely upon our 401(k) and IRAs to keep growing. A plunging stock market could take a bite out of those funds. Personal savings that grow over time and home ownership are worthwhile goals, but real estate prices do fluctuate.

To use a different metaphor, consider a chair with three or four legs. The chair with four legs will always be more stable. The more sources of retirement income you have, the more likely you’ll be financially secure during your retirement, regardless of how long it is.

Reference: Canton Citizen (Dec. 16, 2018) “Smart About Money: Retirement Lessons”