Social Security was only designed to supplement retirement income, not to replace it – yet a recent report by the Federal Reserve indicates that over one-quarter of Americans will be relying on Social Security to get them through their retirement years. According to the Report on the Economic Well-Being of U.S. Households in 2016, 28% of non-retired adults reported having no retirement savings or pension of any kind.
Half of the survey respondents have 401(k) programs, 31% have IRAs, 46% have outside savings such as bank accounts or CDs, 25% have traditional defined benefit pensions, and 25% have other retirement income sources such as real estate or business investments – so clearly a significant number of Americans have multiple retirement savings sources aside from Social Security. Still, 28% report having none of these sources.
Who are the folks dependent on Social Security? As you might expect, lower income correlates well to a lack of a retirement program, as does youth. The survey sorted respondents into three annual income levels (less than $40,000, $40,000 - $100,000, and over $100,000) and found that only 44% of respondents with incomes below $40,000 had any type of retirement savings at all.
This is not a surprising finding. The less money you make, the more difficult it is to have money left over after expenses – if you can avoid outright deficits. Still, the contrast is striking.
For respondents making over $100,000 per year, 95.7% have some retirement savings, with the percentage only varying from 95.5% to 96.6% across all age groups. Ironically, high earners in the 18-29 age group have the highest participation rate. Perhaps acquiring a high salary at an early age indicates responsible fiscal behavior.
In the $40,000 - $100,000 income range, 86.7% reported having some form of retirement funds, but there is a clearer difference among the ages. Only 78.3% of those aged 18-29 have retirement funds compared to 92.5% of those aged sixty and above.
A similar age discrepancy shows up in the low-income category. Only 39% of low-income respondents age 18-29 have any kind of retirement funds, compared to 57.3% of those aged sixty and above. In essence, when considering the ability to save for retirement, age is a minor factor but income level is a major factor.
While it may be a struggle for you as a low-income American to find money to put away for retirement (or as a young American tempted to apply your money to things other than retirement savings), it's extremely important that you do so. By starting late, younger workers miss out on the effects of compounding. Meanwhile, low-income workers have a greater need to supplement Social Security because benefits are based on income levels during working years. A lower salary equates to lower taxes paid in and lower benefits at retirement.
If you have no retirement plan, it's never too late to start. Start by estimating your benefits upon retirement using the Social Security Administration's Retirement Estimator. Estimate how much income you will need at retirement – a good rule of thumb is around 80%-90% of your pre-retirement income. Calculate the difference between income and benefits. Then set up a budget to get a surplus to fill the gap in your retirement goals, and decide how best to apply that surplus (IRA, 401(k), or other vehicle).
Don't be discouraged by a large retirement savings gap. You have started down the proper path, and by taking any pre-emptive action at all, you are in better shape than you were.