- Image by Tobias Higbie via Flickr
Let’s say you are sixty-five in 2011 and as is typical today you have accumulated $200,000 in your 401(k) plan which except for Social Security, represents your retirement income.
Upon retirement you were earning $68,000 a year.
Based on that your monthly Social Security benefit is estimated (using the SSA estimator) at $1,534.00. If you are married your spouse can receive a benefit equal to half your payment (another $767 a month in this example). To assure a stream of income for life you can take your $200,000 and purchase an annuity. That will generate about $1269.00 per month income.
That gives you a monthly income of $2,803 or $33,636 which replaces less than 50% of your pre-retirement income. Can you maintain your lifestyle with a 50% cut in pay? They say that in retirement your expenses go down. Let’s hope they are right. On the other hand many expenses increase or keep going up. In the first year of retirement my health care spending increased by over $600 per month, my property taxes by another $300 per month, and filling the old gas tank…well you get the idea.
So far you have the good news.
The rest of the story is that the monthly annuity will never increase so you are on the hook for inflation reducing its value. In addition, the payment stops at your death. You could buy an annuity with survivor benefits, but that will lower your monthly payment.
Your Social Security benefit may increase with inflation, but so will your Medicare premium which is deducted from your benefit.
The really good news is that upon your death your spouse will receive your full primary Social Security benefit. She now has $1,534 a month to live on (less her Medicare premium of course). By the way, that is $18,408 a year, a whopping 150% of the poverty level.
Then there are taxes. The annuity you purchased is taxable income and a portion of your Social Security may also be taxable.
So how are you doing so far?
Whoa, wait a minute you say, “I’m not turning over $200,000 to some insurance company.” What if I die the next day, it’s all lost! Right you are, you can keep the $200,000 and manage it yourself. All you have to do is figure out how to make it last and generate a stream of income for your life. You do know exactly how long you are going to live, right? And no doubt you have figured out where to invest the money so you can spend what you need to live on. Keep in mind too that if you and your spouse are both age 65 there is a 50% chance one of you will reach age 90.
I’ll leave it to you to sort out the good news and bad news, but please don’t wait too long.
You may find some help here.
If you are one of those Americans fortunate to have an old-fashioned pension plan, you are a bit better off. Your starting income may be seventy or eighty percent of your pay. However, don’t be overconfident. You still must deal with higher health care costs, inflation, survivor benefits and a fixed income.
Related Articles
- Why Women Need More Retirement Savings (money.usnews.com)
- Retiring: Tax Tips (turbotax.intuit.com)
QUINNSCOMMENTARY 
I think those of us in the corporate world have lost site of the fact that the majority of Amercans never had a pension or retiree medical benefits. They seem to have muddled along although no doubt there has been a decline in standard of living. The trick is to have a steady living standard from start to finish. Fixing Social Security would not be such a big deal if so many people did not rely in it for their primary IR sole source of income. It was never intended to be that way.
More and more retired Americans adjusting their standard of living means less discretionary income and that is not good for the economy. Also, I think most people are underestimating the future impact of inflation, higher taxes of all kinds, health care costs and longevity. Despite the rhetoric we have fixed nothing in my view.
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And a cheery good morning to you, too!
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Well at least the sun is shining this morning. On the other hand I just read a CBO report that says the $.7 trillion in underfunding by states and local governments will have to come from taxpayers because legal opinions say in effect government pensions are fixed at the date of hire and can’t be changed even prospectively.
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Dick
For the last 20 years, we’ve been bemoaning the retirement savings rate. I wonder if anyone has stats on what has happened to the living standards for retirees in that time period? Per your earlier comment, I suspect that pensions have been helping to prop up retiree living standards. As pensions wind down, the savings rate will become a bigger issue. While the ideal solution is saving more for a rainy day, I suspect that many retirees short on savings will find ways to adjust their standard of living. There are a surprising number of people who have found a way to live comfortably on a small fraction of what we would consider a normal income. So some might be forced to re-evaluate needs vs. wants. In that light, some of our “necessities” might become luxuries – cars, TV’s, cell phones, etc.
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