In our most recent LinkedIn poll, we had over 700 people view the question “What is the Federal poverty line?”. And only 22% answered it right. Why did we ask the question? We asked it because we wanted to know how many of you realize how many seniors live at this level or below it. Are you going to be one of them? In this article we’re going to attack one of the most common misperceptions about wealth that leads people to suffer a lack of it: that their 401k will be enough to retire on.
Let’s face it – Social Security is broken
Retirement in America is broken. Most people are relying on sources of income that won’t measure up.
For example, Social Security is projected to start to run down in 2035, and the payments will be reduced from thereafter. And even if this weren’t the case, the maximum amount of Social Security you can get every month is $4,555 (if you start taking it at age the late age of 70, that is).
If you live in a state where Social Security is taxed (and there are a handful of them), that amount is reduced by your income tax rate. Given that the cost of housing and basic necessities is going to be, for most people, at least two to three thousand dollars a month, that really doesn’t leave much, if any, room for much other than the essentials. That is, if it even covers the essentials.
This is no way to live.
Do you know what your 401(k) will actually yield?
The other flawed assumption is that their 401k will be enough to retire on.
According to Personal Capital, the average 401k balance for people age 65 and over is $255,151, and the median is $82,297.
Even in the more favorable case ($255k), it isn’t enough. Let’s look at how this actually breaks down using a hypothetical example. According to MarketWatch, the easiest way to estimate how much annual income you’ll get from your 401(k) is to multiply the balance by 4%.
Example: If your balance is $255,000, for example, you’ll get $10,200 of income per year.
That is less than $900 a month which won’t even cover most people’s rent. Consider that Medicare premiums are $164.90 in 2023, and that the cost of Long Term Care is staggering (see table below from MoneyGeek).
Possible solutions to the shortfall
While nothing can be interpreted as advice specific to any one individual (for such advice, consult with a financial advisor), here is some general guidance for ways that you can address the retirement income shortfall.
Here’s my simple take:
People are not looking at retirement planning early enough.
They are waiting too long.
They are waiting until five years away from retirement and it is not enough time to change the delta on how things are going to turn out for you.
Most people have to start 15 years before they are ready to retire to have a material change in the outcome of their retirement. The key element is starting in these retirement plans early and getting time to be on your side as opposed to being against you.
More time is never a hindrance and always a help in financial planning.
- It allows your portfolio time to recover from a bad market
- The power of compounding can potentially be very strong. Investing a small amount and letting the dividends and/or interest compound over a span of decades can result in potentially large accumulation.
- It allows you to save slowly for your major goals.
- It allows you the time to approach major life decisions by gathering all necessary data and taking steps to get there strategically and steering clear of headwinds instead of being “in a pinch.”
Have you set up your retirement plan yet?
Contact us to talk. We are a Sparta, New Jersey financial advisor working with anyone who has the goal of retiring successfully.
AARP. (28th December, 2022). Which states tax Social Security benefits? https://www.aarp.org/retirement/social-security/questions-answers/which-states-do-not-tax-social-security-benefits.html
ASPE. HHS Poverty Guidelines for 2023. https://aspe.hhs.gov/topics/poverty-economic-mobility/poverty-guidelines
Centers for Medicare & Medicaid Services. (2022, November). 2023 Medicare Costs. https://www.medicare.gov/Pubs/pdf/11579-medicare-costs.pdf
Deer, Paul. (7 September, 2022). The Average 401k Balance By Age. Personal Capital. https://www.personalcapital.com/blog/retirement-planning/average-401k-balance-age/
Lange, Mark. (2023, January). [Post]. LinkedIn. What is the Federal poverty line for individuals in 2023? https://www.linkedin.com/posts/mark-lange-aif-ricp-5a1a0012_activity-7016774191983001600-qq5K?utm_source=share&utm_medium=member_desktop
MoneyGeek Team. (2022, November 27th). MoneyGeek. The Sobering Cost of Long-Term Care. https://www.moneygeek.com/seniors/resources/paying-for-long-term-care-guide/
Powell, Robert. (2021, February 10th). Market Watch. https://www.marketwatch.com/story/how-much-income-will-your-401k-provide-2021-02-10
Social Security Administration. (2022, January 3rd). What is the maximum Social Security retirement benefit payable? https://faq.ssa.gov/en-us/Topic/article/KA-01897#
Washington, Kemberley. (2023, January 27th). Forbes. 2022-2023 Tax Brackets & Federal Income Tax Rates. https://www.forbes.com/advisor/taxes/taxes-federal-income-tax-bracket/
Disclosures: The opinions voiced in this material are for general information only and are not intended
to provide specific advice or recommendations for any individual. To determine which strategies or
investments may be suitable for you, consult the appropriate qualified professional prior to making a
decision. The examples used are hypothetical in nature and are not representative of any specific
investment. Your situation and results may vary.