Why Is Retiring So Hard? Turns Out the Money Game’s Rigged

Can you guess the median net worth (excluding home equity) for seniors ages 65-69?

Just under $65,500, according to DQYDJ (from Fed data).

And more than 3 in 4 American seniors in that age cohort don’t have enough saved up to achieve even the median living standard without continuing to work for money.

Need I say more?

But I will, of course, or this would be a remarkably short and useless piece, right? So, let’s dive in and see what’s really going on…

What I Do and Don’t Mean by Retirement

I don’t like the traditional idea of retirement.

Days filled with watching TV, running errands for your kids (if you’re lucky enough to have them living nearby), sitting on park benches, etc.

Sure, having the option to do those things whenever you want, some of the time, would be awesome. 

But although I’m 60, I don’t think I’ll be ready to stop being productive for a long time yet. Maybe it runs in the family – my oldest sister still worked full-time-plus in her practice at 76, and our middle sister is still working in her practice as she approaches age 70.

And it isn’t (purely) out of necessity.

However, getting to a “work-optional” status is certainly one of my biggest remaining financial goals. So anywhere in this article where you read “retirement,” I’m talking about getting to a work-optional stage.

Age Matters to the Plausibility of Retirement

In a recent article about the interrelationships between high income, high net worth (wealth), and financial independence, I wrote you’d need to have a net worth in the top few percentiles in the US if you want to be able to retire with any level of comfort.

Since I wanted to include early retirement as a possible goal, I used the overall adult population’s household income percentiles as a proxy for retirement spending, didn’t account for Social Security benefits, and used the overall adult population net worth percentiles, rather than the net worth of people in their late 60s.

Let’s see how the picture changes if we consider retiring in your late 60s…

Using Data to Figure Out What It Takes to Retire

If you’re in your late 60s, you’re most likely expecting Social Security benefits (if you haven’t already claimed them).

You could delay to age 70 to have your benefits increase by 24 percent for life (that’s my plan).

Or you may need to claim as early as age 62 and have your retirement benefits cut by nearly 30 percent for life.

The Social Security Administration uses a formula to calculate your Primary Insurance Amount (PIA). The formula uses your Average Indexed Monthly Earnings (AIME) based on your 35 highest indexed annual Social Security earnings.

The formula goes like this: 

• 90 percent of your AIME up to $1115, plus
• 32 percent of your remaining AIME up to $6721, plus
• 15 percent of the remainder of your AIME 

Where the above (annually adjusted) “bend points” ($1115 and $6721) are true for 2023. Based on the 2023 maximum Social Security benefit of $3627, the maximum AIME at this time is $13,212.

For example, if your final AIME is $5850 (annual income equivalent of $70,182), and you claim in 2023 at your Full Retirement Age (FRA), your benefit would be $2518 a month, or $30,219 a year.

You Don’t Need 100 Percent of Your Pre-Retirement Income

Especially if you’re in your late 60s, you need a lot less than your pre-retirement income. Most advisors suggest lopping off 20 percent to account for things you won’t need to cover anymore, including:

• Saving for retirement
• Commuting costs
• Business apparel and its care
• Payroll taxes
• As-high income taxes

If you just paid off your mortgage before retirement, congratulations! You can probably cut off another 10-15 percent.

But for our purpose, let’s go with 80 percent of pre-retirement income.

The Resulting Reduction in Required Income for Retirement

According to DQYDJ, here are some household income percentile levels, and what they look like after you trim 20 percent and reduce them by the estimated Social Security benefit for those income levels (the negative result at the 10^th percentile was set to zero).

Now, for simplicity, let’s use the 4% rule to estimate what net worth (excluding your home equity) you’d need to achieve these final “retirement budget” amounts.

Kevin Lao, CFP, Founder and Director of Financial Strategies, Imagine Financial Security, LLC, comments on the 4% rule I’ve assumed here, “The 4% rule is a great benchmark, but that doesn’t mean you should follow it strictly. In fact, following the 4% rule might lead you to have a significant surplus of assets in your 80s and 90s when you could have spent more during your “Go-Go Years” of early retirement. Some variables that might help you increase the 4% rule to perhaps 5% or even 6% are properly diversifying your portfolio, managing taxes effectively, and/or maintaining flexibility with your financial legacy goals.”

What Net Worth Percentile Do You Need to Reach Relative to 65-to-69-Year-Olds?

Now that we know what net worth you need to be able to afford your estimated retirement budget (by household income percentile, we can see what percentile that would be in terms of the net worth of 65-to-69-year-old people.

Does Your Income Percentile Match the Required Net Worth Percentile?

Obviously, if you’re in the 10^th percentile in terms of your household income, Social Security is more than enough to let you continue surviving without any retirement savings.

That’s lucky because with such a low income, asking you to save for retirement is ridiculous.

However, once you “jump up” to the 20^th income percentile, Social Security simply won’t cut it. You need at least $142k saved up. Comparing that to the net worth of people in their late 60s, that requires you to reach at least the 56^th net-worth percentile for seniors!

As your household income percentile increases, so does the senior net-worth percentile you have to achieve to ever reach a work-optional status.

As the above table and the following graph show, it’s only when you reach the 96^th household-income percentile that the required senior-net-worth percentile matches it. 

And only from a 98^th-percentile income is the required net-worth percentile lower.

The Bottom Line – The Game Is Rigged Against the Poor and Middle Class

According to US News & World Report, if your income is under $52,200 (38^th percentile), you’re considered “low income.” If your income is above $156,600 (81^st percentile), you’re “upper income.” With an income between those two levels, you’re “middle income.”

Let’s first look at the middle income… 

If your income is in the 38^th percentile, you’d need to achieve close to the 70^th percentile in net worth for a reasonable retirement. If you’re in the 81^st percentile of income, things are a little better – you need to rise to “just” the 92^nd percentile of senior net worth to retire.

How about the low-income folks among us?

If they’re in the 20^th percentile, they’d need to nearly triple their percentile rank in net worth to retire! Easy, right? (sarcasm alert)

But if you’re in the higher-income class, say in the top 10 percent, you don’t have to reach a net-worth percentile that’s much higher than your income percentile.

And if you’re in the top 1 percent, you can relax even if your net worth “sags” to the 98^th percentile.

Clearly, in this rigged game, you have to work much harder if you start at the bottom, which is obvious, but even if you’re above 80 percent of the population.

Is it fair that this is how the system is?

No, but unfortunately, we can only work on things in our control. So here are the things you can do, which are simple, though not easy:

• Do your best to always live beneath your means
• Once you have at least some emergency cash, invest, invest, invest the rest
• Invest in yourself by acquiring highly compensated skills that will increase your income
• Whenever your income increases, divert 50-67 percent of that new income to investments
• Over time, build additional income streams to diversify your income as you increase it

It may not be fair, but it’s what’s so.

P. Timothy Uihlein, CFP, MBA, Partner, Managing Director, and Senior Wealth Manager at Vincere Wealth Management, agrees you have a few crucial things you can control, “You can overcome a significant disparity between your current wealth and what you need by retirement by making smart choices with your money. Unless you get a part-time job, you may not make more money in retirement, but you can streamline your investments and curb your spending. An advisor can help streamline investments by, e.g., using lower-cost investments and increasing dividends.”

Jorey Bernstein, Executive Director Wealth Manager and Founder, Bernstein Investment Consultants, reminds us that, “Achieving wealth is a journey that requires discipline, patience, and education. Keep learning, and seek professional advice to ensure a brighter financial future.”

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.