I tripped over a couple of statistics the other day that made me rethink the plight of the average American retiree. First, the average couple on Social Security gets over $28,000 per year. Secondly the median net worth of Social Security age couples is $228,000. Now it gets more complex than this in the real world but if you combine those into a total net worth of sorts it turns out the normal American who has retired at the conventional sixty something age can actually make a claim at being a millionaire, with a tiny amount of rounding up!
Here’s my math, first the 4% rule indicates that your annual income from investments can be safely 4% of their total value in a year. So if Social Security pays you $28,000 a year then by definition it is roughly equivalent to $28,000/4% which is $700,000. If you add your median net worth of $228,000 to that you are sitting with a net worth of $928,000. Most people would consider that within throwing distance of being a millionaire! So where is this retirement crisis we keep hearing about? These are real numbers, the median net worth is of households 65-75 years old and the Social Security payments are straight from the Gov. It tells me that the median retired family today is doing absolutely great, they are basically millionaires. Their kids are grown and gone, they are on Medicare and their income is not taxed nearly as highly as younger people’s. They’ve got this, they are fine!
But what about the hysteria over total lack of preparation for retirement, maybe we should look at the people who are almost about to retire? Surely they are all drowning in negative net worth? Well, their median net worth is still around $190,000 and there is no reason to suspect their median Social Security checks will be much different from the already retired folks is there? I would expect them to be in just as good of shape as today’s retirees.
And that explains a lot to me, why the streets are not full of starving senior citizens. They are not doing so badly, they are essentially living off of millionaire portfolios with less taxes (some of Social Security is not taxed) and have hugely subsidized health care. The same will hold true for median couples within ten years of conventional retirement. I find it amazing that I can present such a positive outlook on retirement while the mainstream press decries it an absolute national crisis, using exactly the same data. But the facts are what they are.
But does that mean everyone is fine? No, unfortunately it does not. It means that the median couple is. But half the US couples live below the median and half live above it. About all you can say is that at least half of current and near future retired couples will be fine with the savings they already have, and that is without a single source of income except Social Security and their net worth. The other half have less, and some have much less. And it doesn’t take 50% to make a crisis, if even 5% of the population are homeless in their senior years that’s a national crisis. If even one is destitute and starving that is a personal crisis and a moral one for all of us. So do not think I’m saying “We are all rich, everything is OK!” Because I’m not. What I am saying is that most Americans would seem to be absolutely fine and well above any serious financial risk in retirement. And that makes perfect sense when you consider that for the last 100 years the US has been one of the richest countries in world history. It is also a testament to Social Security having achieved its goal for most of us.
So why the disconnect between popular opinion and the fact that median retirees, half of the retired people in the US, are living the financially independent life? At the very least they are living the lean FI life. There are dozens of bloggers in this space whose FI target number is one million dollars or less. That will provide them exactly the same lifestyle as the median retiree has, and they’ve shown it is a pretty ample life if lived frugally. I think, in part, it is the fact that bad news sells and good news bores people. Also to say that the only thing you need to do to become financially independent is to survive until 66 years of age isn’t very sexy. Plus, while my wife and I are still pretty good athletes at sixty plus, most younger people can’t fathom how anyone over fifty can even get around without a walker. There are countless studies that show that fear and pain impact us more than pleasure. So I suspect that we will all still harbor a secret fear that we might be eating cat food in our eighties if we aren’t extremely careful with our money today. Even if the numbers do not support that gloomy outlook.
What is your experience, are over half of the seniors you know destitute and living in abject poverty?
Does a nearly million dollar net worth in today’s dollars provide a decent living for retirees?
Will these same numbers hold true for Gen X and Millennial retirees? They do depend on Social Security remaining unchanged.
I don’t see any seniors sleeping under bridges where I live, but the majority I know had pensions to rely on. And like you mention in your post, the SS benefits make a nice supplement to what they’ve already accumulated. Additionally, most of the previous generations seem far more capable at living frugally and making due with what they have, versus running up huge amounts of debt to buy things not needed just to keep up with neighbors they don’t even know.
A million dollars goes a long way if your health care is funded and you have no debt, but I doubt it will be enough for those who ended up retired with a large mortgage, car loans, credit card debt, etc.
I don’t factor SS in my retirement numbers, not because I don’t believe the funds will be there, but because I believe major changes are coming to how the money is disbursed, which will include means testing that will eliminate checks for those of us who saved, lived below our means and took some level of responsibility for our future. Any time the government moves legislation forward to provide funds specifically for folks unwilling to work, you should know that we’re in trouble…
Actually pensions phased out earlier than you might think. My company shut theirs down 40 years ago and they were right in the middle of the pack when it came to doing that. Less than a third of all retired people currently draw a pension and for those the amount is less than $20,000 per year. For non government retirees it is less than $10,000. That’s a nice amount to add on but most current retirees really aren’t receiving it. And in my numbers I did not count pensions at all. I don’t count Social Security either, in that I have enough to live my life very comfortably at a safe withdrawal rate but I’m certain that it will be there for me, with at most an acceptable reduction in benefits in part due to me being much closer to drawing it than most people. I don’t think it will ever be eliminated for anyone, but it could be taxes heavily or cut back for sure, especially for younger people who may be punished for having done the smart thing. Thanks for your insightful comments!
I should have prefaced my response with the ‘handful’ of retirees I know…most of whom actually draw small pensions to go with their social security checks. But I agree that those have been phased out for most and am thankful for employer contributions and having the foresight to take advantage of compound interest. I have well over a decade before I can draw, and again, I don’t trust an establishment that would actually even debate giving money to people unwilling to work.
Your last sentence in this post is the one that is the most important for those that are 15+ years from hitting social security age. Will these current benefits be the same then? I highly doubt it and think that there will have to be a revamping of the system (lower benefits, later qualified age, etc).
I therefore do not really factor social security benefits in my personal retirement plans and whatever I do get will be considered “bonus money.”
Also a lot of these retired people’s net worths are tied up in their homes. So either they have to do a reverse mortgage or downsize it to access capital to live off of.
Very good points, the fact that many of today’s retirees are doing OK doesn’t mean that will hold the course when Social Security starts to falter. Plus if the country shifts to the left then more progressive payments that reduce the checks to wealthier individuals could very well occur. I don’t plan to need SS either but having paid in the maximum for my whole career I hope I get something out of it!
Steve – your example demonstrates the incredible value of SS. Even if that benefit is cut in half, you have the equivalent of US Treasury bonds (SS payments) generating $19,000/yr as fantastic supplement. Even though I’m similar to you in planning for the worst, there will be some type of US Treasury Bond Fund, i.e. SS, available when we retire.
Semper FI,
Luis
I think for people in their sixties, like me, there will be benefits much like today. The usual way they are reduced over time is to go after the benefits of people who aren’t getting them yet and grandfather the current recipients. But the outcry over taking the program away from the very people that paid for it would be a scary thing for Congress to face.
Since you asked, here are my observations to some of your points.
1. For those even with the ~200K in savings at 65, if that’s all they’ve saved over a lifetime, they are probably NOT very good with money. I’m not being mean… it’s just a fact. (I’m also speaking from experience with various relatives in my family at or below that 200K number).
2. And if they are not good with money, they will NOT be able to make that 200K last with a 4% withdrawal rate. (Again, speaking from experience with my relatives, they simply don’t understand they can ONLY pull 4% — not $25,000 or whatever they feel like using)
3. Yes, a frugal-minded FI person would be just fine with what you describe, but those people are still rare. Have you ever tried to speak/teach to someone FI(RE) who has never thought or heard about it? I’ve had even people I considered fairly book-smark look at me like I was trying to teach Russian.
4. It is crisis for most people to live within a strict budget, too. Mentally and financially. Again, trying to help loved ones stay within a budget once in retirement (or after their partner died)… they just didn’t understand.
5. And lastly, assisted living can get quite expensive. Where they are fine the first 10 or so years, once they get into late 70’s and 80’s and require more care, that money will go FAST.
So, I agree with you that it’s possible… just not probable for most non-FI people.
Those are good points, and I had not really thought about it from that perspective. What’s enough for someone like you or me is probably going to get blown through by people who don’t have the mindset to optimize finances. And if they did have the mindset they’d likely have invested and saved more. I agree that it is a rare mindset, it is easy for me to forget because in this community almost everyone is a virtuoso with the concepts of frugality, paying themselves first, minimalism and prioritizing. I forget that that’s not the way the world works for most people. I kind of felt there was something misleading about the post when I wrote it but I couldn’t put my finger on it. I think it is exactly what you are saying. I think I could survive really well in that scenario, but many people just will not.
Nothing misleading about your post, Steve. The basis of it is 100% correct; it’s all about the execution of the plan by others.
I mentioned your post in my blog post today, and expanded on my overall views on the topic. It’s all about finding your WHY for FI…
This is a really interesting take on Social Security. I never thought about it this way. I spend most of my financial planning not including it – though I’m not one of those people who thinks it’ll be gone by the time I retire (I’m 35) – I just want to view it as a bonus, though I shouldn’t because I know I’ll be taxed on it. One thought this gave me is that SS is kind of like an annuity – we get an allotted amount each year but we did contribute toward it throughout our working years. I guess we just never had control over it so maybe that’s why we don’t consider it.
It is a good comparison to an annuity, I could do fine without it but don’t think that will be necessary. I think I’d discount it if I were your age too, just to be conservative. But we are relatively close to drawing it so it isn’t likely to change a great deal in the short term.