What this article covers
Median retirement savings for Americans in their late 60s look alarmingly low, but Opher Ganel finds that Investment Company Institute data tell a far better story: the typical retiree tracked from age 55 to 72 kept more than 90 percent of their inflation-adjusted spendable income. He breaks down where retirement income comes from and who is most at risk of falling short, and three financial advisors share how near-retirees can close a savings gap.
Key Takeaways
Most retirees keep more than 90 percent of their pre-retirement spendable income
An ICI study that followed workers from age 55 in 2000 to age 72 in 2017 found the typical individual maintained more than 90 percent of the inflation-adjusted spendable income they had from ages 55 to 59. The bottom five of 20 income groups replaced 100 percent or more on average, the middle-income group 93 percent and the second-highest group nearly 80 percent.
Median savings alone understate retirement income because Social Security, homeownership and pensions fill the gap
Median savings of $132.3k for Americans in their mid-to-late 60s would provide only about $550 a month at a 5 percent draw. Yet 97 percent of 72-year-olds in the ICI study received Social Security, three in four had retirement income, and owning a home with little or no mortgage removes a rent bill that could otherwise eat up over half of a retired couple’s income.
Retirees used to a high standard of living with little saved face the biggest income shortfall
The second-highest income group’s replacement rates ranged from about 55 to 105 percent between the 25th and 75th percentiles, and Opher warns that high earners who haven’t saved much may replace less than 60 percent. The advisors interviewed point to working a few years longer, part-time work, maximizing contributions (including catch-up contributions after 50) and planning around essential spending rather than a fixed replacement rate.
Arielle Tucker
Benjamin Simerly
Mike HunsbergerFor most, the news is surprisingly good…
If you’ve started thinking about what your retirement may look like, the news seems grim.
According to the DQYDJ.com net worth calculator, the median savings (excluding equity in your home) for Americans in their mid-to-late 60s is just $132.3k. Even if you assume a 5-percent annual draw, this would provide just $550 a month.
For a couple where both receive the average Social Security retirement benefit of $1917, this adds up to just $4380 a month, putting you in the 43rd income percentile for age 67 according to DQYDJ’s income calculator.
Assuming the above-mentioned average spousal benefit and the $550 a month from your nest egg, this adds up to about $3430 a month, putting you in the 33rd percentile for age 67.
How Far Does a Typical Retirement Income Go Against Today’s Rents?
The national average rent for a two-bedroom, 999-square-foot apartment is $1819.
That’s over half the above $3430 income and nearly 42 percent of $4380. According to the National Low-Income Housing Coalition, paying over 30 percent of your income on housing makes you “housing burdened” and paying over half makes you “severely housing burdened.”
Clearly, living in or near a high-cost-of-living city is out of the question (e.g., in NYC, the average rent is $3847, nearly 88 percent of even the higher monthly income of $4380).
Where Does Retirement Income Come From? The 5 Main Sources
According to the Investment Company Institute (ICI) 2024 factbook, income in retirement comes from five sources: Social Security, homeownership, employer-sponsored plans (e.g., 401k, 403b, 457b, etc.), individual retirement accounts (IRAs), and “other assets.”
Starting with Social Security, if you’re in the lowest quintile (fifth of the population) in terms of lifetime household earnings, the Congressional Budget Office (CBO) estimated your benefits would replace 78 percent of your inflation-adjusted lifetime earnings on average.
As your income increases, this replacement rate drops to 58 percent (second quintile), 49 percent (third quintile), 41 percent (fourth quintile, and 31 percent (highest quintile).
Retirees tend to own their homes and have either paid off their mortgage or have a low mortgage payment. Since, as mentioned above, housing could eat up over half of a retired couple’s income if they rent, having a low (or no) mortgage payment can dramatically reduce your monthly expenses.
On average, 77 percent of near-retirees have employer-sponsored retirement plans and/or IRAs. The participation rate is, obviously, dependent on income, with 42 percent of the lowest quintile having such assets, rising sharply to 65 percent (second quintile), 85 percent (third quintile), 95 percent (fourth quintile), and 98 percent (top quintile).
Interestingly, 38 percent of near-retirees have a defined-benefit plan, also known as a pension. However, as a cautionary note, many pension plans are underfunded – over 30 percent of government-plan promised benefits are not covered by plan assets, as are 12 percent of benefits for private-sector plans. This means that, once you retire, at least some of the benefits you’re counting on may not materialize.
“Other assets” include bank accounts, taxable portfolio assets, ownership stakes in businesses, second homes, etc., of which higher-income workers naturally tend to accumulate more.
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How Much Pre-Retirement Income Do Retirees Actually Replace?
According to the ICI study, things are not so dire for American retirees after all.
The ICI looked at workers who were 55 years old in 2000 and compared their retirement income at age 72 (in 2017) to their pre-retirement income in their late 50s.
According to the factbook, “…at every age through age 72, the typical individual maintained more than 90 percent of the inflation-adjusted spendable income they had, on average, from age 55 through age 59. Spendable income is the income available after paying taxes and contributing to retirement accounts.”
Splitting this cohort of workers into 20 groups by income, they found that the bottom five groups replaced 100 percent or more of their pre-retirement income on average, the replacement rate for the middle-income group was 93 percent on average, and nearly 80 percent for the average worker in the second-highest income group.
However, there was a wide distribution of replacement rates within each of the 20 income groups.
For example, for the second-lowest income group, the 25th percentile replacement rate was 80 percent while the 75th percentile was 200 percent(!).
For the middle-income groups, the 25th percentile was 70 percent vs. 120 percent for the 75th percentile.
The second highest income group saw a 25th to 75th percentile replacement range of about 55 to 105 percent.
As for income sources, the study found that, at age 72, 97 percent received Social Security benefits (for either or both spouses), 75 percent had retirement income, 48 percent had Social Security benefits and non-labor income, and over 25 percent had Social Security, non-labor income, and labor income.
Very few had no retirement income – 16 percent had just Social Security benefits, seven percent had that plus labor income, and only 0.2 percent had just labor income.
What Financial Advisors Say About Closing a Retirement Savings Gap
I thought it would be interesting to see what financial professionals think about all this. While their takes weren’t surprising, they certainly bear considering.
Arielle Tucker, founder of Connected Financial Planning, says:
Near-retirees often find themselves behind due to factors such as starting to save later in life, unexpected medical expenses, market downturns affecting their investments, or not adjusting their savings rate as their income increases. Additionally, underestimating longevity and the rising cost of healthcare can leave them unprepared. I also find that many families choose to provide significant financial support to their children or grandchildren—funding education, weddings, or assisting with home purchases. While these are generous and meaningful gifts, they can significantly deplete long-term savings if not carefully planned. These large expenses must be considered within the broader context of the retirement plan to ensure they don’t jeopardize the retiree’s financial security. If someone’s savings are lagging, I recommend they consider a combination of the following five strategies.
- “Postponing retirement by a few years can provide additional time to save and reduce the number of years your savings need to support you.
- “Evaluating and adjusting your current spending habits to free up more money for savings. This includes cutting unnecessary expenses now and planning for a more modest lifestyle in retirement to lower the income you’ll need.
- “Taking full advantage of retirement savings vehicles by contributing the maximum allowable amounts. This is especially important if you’re eligible for catch-up contributions after age 50.
- “Reassessing your investment portfolio to ensure it’s aligned with your retirement goals and risk tolerance. You may need to seek higher returns by adjusting your asset allocation, but be cautious of taking on excessive risk.
- “Considering part-time or freelance work during retirement. This approach serves two purposes, adding income to help bridge the gap between your savings and retirement needs and thus reduce the pressure on your retirement assets, and staying connected to your community, providing a sense of purpose and enhancing your overall wellbeing. Whether it’s consulting in your field, turning a hobby into a small business, or working with local organizations, part-time work can be both fulfilling and financially beneficial. Engaging in meaningful part-time work helps maintain social connections and intellectual stimulation. It’s an excellent way to stay active and contribute to your community while addressing financial needs. Your path isn’t set in stone – you can always pivot and adjust near or even during retirement.”
Benjamin Simerly, Founder, Lakehouse Family Wealth, says:
We encourage clients to have at least a 120% income replacement rate in retirement. With healthcare costs increasing as quickly as they are, we encourage clients to aim for more in retirement than they have during their working years, even if they aim to retire conservatively.
Near retirees are at the most significant risk of three types of inflation post-covid: food, housing, and healthcare. The scariest situation we see is when a near-retiree has a major health event just before or just after retirement. This can eat up a large amount of retirement assets early on before it has a chance to grow. Plus, there often isn’t an easy way to make that money back when someone is already mentally retired.
For near-retirees and retirees with lagging savings, the biggest benefit can come from a part-time job. Even an additional amount as small as $1,000 per month can make all the difference in living expenses. And it has the added benefit of much-needed socialization for people who often lose friends who move to be close to their grandchildren or pass away.
It’s not common to find clients who have saved too much. Most Americans live right at the edge of their available income and assets. The irony is that it’s often nearly impossible to help those who ‘saved too much’ feel secure in their retirement. They are often far more worried than most about the next ‘big crash.’ But for these clients, charitable giving and non-profit involvement can often solve both concerns by getting clients active and giving them something healthy on which to focus.
Mike Hunsberger, Owner, Next Mission Financial Planning, pushes back on the income-replacement metric:
I prefer to use goal-based spending vs. a set income-replacement rate. I’ll understand what retirement looks like for a client and come up with the minimum income they’ll need for their essentials, like housing, healthcare, and food. We’ll also look at having money available for long-term care, aging expenses, inheritance, and charitable donations. Finally, we set aside money they want to spend beyond their minimum income for things like travel or hobbies.
The one thing I’ve seen recently is more older couples with significant student loan debt that they accumulated for their kids’ education. Having to make hundreds of dollars in monthly payments reduces the money you can use for your enjoyment. The single best way to compensate for under-saving is to work a bit longer. Every year you delay retirement reduces the amount you need to save. If you can also save some of that income, that’s a bonus. I regularly see clients who have more than they’ll need but still have a hard time spending. I believe it’s my job to help them understand they’ll be okay, giving them ‘permission’ to spend.
The Bottom Line: Most Retirees Replace More Income Than Their Savings Suggest
Looking at the raw numbers of how much older Americans have managed to save for retirement is misleading. The median investable net worth is very low, implying only minimal non-labor retirement income can be had.
However, looking at actual income replacement rates for retirees at age 72 vs. their pre-retirement income in their late 50s, we see that the majority managed to replace over 80 percent of income. For lower-income American workers, that replacement rate ranged up to double their pre-retirement income!
What’s more, only one in three 72-year-olds still worked for income, and presumably not all of them did so because they had to.
The one situation where you could run into trouble is if you’ve become accustomed to a high pre-retirement standard of living but haven’t set aside much to fund your retirement. In this scenario, your retirement income may replace less than 60 percent of your pre-retirement income, requiring some painful cuts to your budget once you retire.
Frequently Asked Questions
How much of their pre-retirement income do most retirees replace?
According to the ICI study cited in the article, the typical individual maintained more than 90 percent of their inflation-adjusted spendable income from ages 55 to 59 at every age through 72. Lower-income groups often replaced 100 percent or more, while the second-highest income group replaced nearly 80 percent on average, with wide variation within each group.
Where does retirement income come from?
The ICI identifies five sources: Social Security, homeownership, employer-sponsored plans such as 401(k), 403(b) and 457(b) plans, IRAs, and other assets such as bank accounts, taxable investments, business stakes and second homes. At age 72, 97 percent of people in the study received Social Security benefits, and only 0.2 percent relied on labor income alone.
How much of pre-retirement earnings does Social Security replace?
It depends heavily on income. The article cites Congressional Budget Office estimates that Social Security replaces 78 percent of inflation-adjusted lifetime earnings on average for the lowest fifth of earners, falling to 58, 49 and 41 percent for the middle quintiles and 31 percent for the highest.
What income replacement rate should I plan for in retirement?
Advisors interviewed disagree. One encourages clients to aim for at least a 120 percent income replacement rate because healthcare costs are rising quickly, while another prefers goal-based spending: first the minimum income needed for essentials like housing, healthcare and food, then money for long-term care, inheritance and charitable giving, and finally discretionary spending such as travel and hobbies.
What can I do if my retirement savings are behind?
The advisors interviewed recommend postponing retirement a few years, trimming spending now, contributing the maximum to retirement accounts (including catch-up contributions after age 50), reviewing your asset allocation without taking on excessive risk, and considering part-time work. One advisor noted that even about $1,000 a month from a part-time job can make a real difference in covering living expenses.
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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.
About the author
Contributing Writer, Wealthtender
My career has taken some unexpected turns, from earning a PhD in experimental high-energy physics, to conducting cosmic-ray research in Antarctica, to supporting NASA projects and programs, to running my own consulting business. I also run several other small businesses and help my wife run her Marriage and Family Therapy practice.
Those experiences taught me to question assumptions, think critically, and recognize that real-world decisions of any significance rarely have simple answers that apply to everyone. Today, I bring that perspective to writing about personal finance. Drawing on my analytical background, business experience, and research, I explore financial decisions, challenge conventional wisdom, and help readers understand the tradeoffs that can affect their financial well-being. To complement my own research and experience, I also weave insights from financial professionals into my articles, drawing on their expertise and real-world experience helping clients navigate financial decisions and challenges.
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