What this article covers
Opher Ganel combines Social Security’s benefit formula, the 4% rule and net worth data for Americans ages 65 to 69 to calculate how much wealth each income level needs to reach a work-optional retirement. The result: low and middle earners must climb far higher in the senior net worth rankings than their income rank, and only households near the very top of the income scale find the math in their favor. He closes with the five steps within your control, alongside comments from three financial advisors.
Key Takeaways
Low and middle earners need a far higher net worth percentile than their income percentile to retire
After trimming spending to 80% of pre-retirement income, subtracting estimated Social Security and applying the 4% rule, a household at the 20th income percentile needs about $142,000 saved, which already ranks in the 56th net worth percentile for 65-to-69-year-olds. A 38th-percentile income needs close to the 70th net worth percentile, and an 81st-percentile income needs the 92nd.
Only households near the top 4% of incomes find the retirement math in their favor
In Opher Ganel’s analysis, the required senior net worth percentile matches the income percentile only at the 96th household income percentile, and drops below it only from the 98th. With median net worth (excluding home equity) for Americans ages 65 to 69 just under $65,500, more than 3 in 4 seniors in that group can’t fund even a median living standard without working.
Living below your means and investing raises are the levers you control
Ganel’s playbook: live beneath your means, invest everything beyond an emergency cushion, build higher-paid skills, divert 50% to 67% of every income increase to investments and add income streams over time. Kevin Lao notes the 4% rule is a benchmark rather than a strict rule, and P. Timothy Uihlein points to lower-cost investments and controlled spending.
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 Does Retirement Mean? Reaching a Work-Optional Stage
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.
How Your Age Changes What It Takes to Retire
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…
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How Social Security Benefits Factor Into What You Need 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.
How Much of Your Pre-Retirement Income Do You Need in Retirement?
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.
How Much Retirement Income You Need After Social Security, by Income Percentile
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 10th 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 Retire Compared With 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.
Why Lower Earners Need a Much Higher Net Worth Percentile to Retire
Obviously, if you’re in the 10th 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 20th 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 56th 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 96th household-income percentile that the required senior-net-worth percentile matches it.
And only from a 98th-percentile income is the required net-worth percentile lower.
The Bottom Line: Retirement Math Is Rigged Against Low and Middle Incomes
According to US News & World Report, if your income is under $52,200 (38th percentile), you’re considered “low income.” If your income is above $156,600 (81st 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 38th percentile, you’d need to achieve close to the 70th percentile in net worth for a reasonable retirement. If you’re in the 81st percentile of income, things are a little better – you need to rise to “just” the 92nd percentile of senior net worth to retire.
How about the low-income folks among us?
If they’re in the 20th 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 98th 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.
5 Things You Can Control to Retire on a Low or Middle Income
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.
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Frequently Asked Questions
Why is it so hard to retire on a low or middle income?
Because the net worth you need to replace your income ranks much higher among seniors than your income ranks among households. In the article’s analysis, a 38th-percentile income requires close to the 70th percentile of senior net worth, and a 20th-percentile income requires nearly triple its percentile rank. Only near the top of the income scale do the two percentiles line up.
How much of my pre-retirement income will I need in retirement?
The article uses 80% of pre-retirement income, reflecting the common advice to cut 20% for costs that go away in retirement, such as saving for retirement, commuting, work clothing, payroll taxes and higher income taxes. If you pay off your mortgage before retiring, Ganel suggests you can probably cut another 10% to 15%.
How does Social Security calculate my retirement benefit?
Social Security applies a formula to your Average Indexed Monthly Earnings (AIME), based on your 35 highest indexed years of earnings, to set your Primary Insurance Amount. The formula replaces 90% of AIME up to the first bend point, 32% up to the second and 15% above that, so lower earners get a larger share of their income replaced. Claiming before or after full retirement age then lowers or raises that amount for life.
Is the 4% rule a reliable way to estimate how much I need to retire?
The article uses the 4% rule as a simple way to translate a retirement budget into a savings target. One advisor interviewed calls it a great benchmark but not a rule to follow strictly, since it can leave a large surplus late in life, and says diversification, tax management and flexible legacy goals may support withdrawals of 5% or even 6%.
What can I do to retire if I don’t earn a high income?
Ganel lists five steps: live beneath your means, invest everything beyond some emergency cash, build highly compensated skills, put 50% to 67% of every raise toward investments and develop additional income streams over time. Advisors interviewed add that streamlining investments with lower-cost options, curbing spending and seeking professional advice can help close the gap.
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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.
At medium.com/@opher-ganel, you can read more of my articles and subscribe to receive email notifications when new ones come out.