Planning Social Security, Pension, & IRA Income
Pensions & Social Security Aren't Adequate Retirement Income Sources
Nov 9, 2009
Over the last several decades, pensions - once the only non-Social-Security source of retirement income for most retirees - have been supplemented more and more by individual retirement accounts, or IRAs. If current trends continue, and pensions shrink or disappear while Social Security's payouts dwindle, IRAs will eventually become the vast majority of retirees' income. Understanding how much income each will contribute is critical in creating a retirement plan.
Income Sources During Retirement
Several factors determine how much income will be replaced by Social Security and/or pensions once a worker retires. Primarily though, age income, and savings will determine the amount of income enjoyed during a worker's post-work years.
The younger the worker, the less (relatively) Social Security will provide. Moreover, the younger the worker, the less likely it is that employee will have access to a pension fund. Instead, the younger that employee is, the more apt he or she is to rely on a company-sponsored retirement account.... which does not guarantee a specific amount of retirement income. Rather, an IRA simply accumulates dollars that are the property of the worker and pad as a lump-sum at retirement. The more dollars accumulated, the bigger the account grows, and the greater the income it can provide during retirement.
But what should workers approximately expect when it comes time to stop saving and dip into those savings? Here's a basic framework centered around the assumption that a retiree will annually need 80% of his last year's pay to maintain the same standard of living enjoyed while working.
Bear in mind these are only approximations.
Retiring With Pension Income
For older workers and those close to retirement, about 45% of retirement income will stem from defined benefit pension plans. IRAs will only provide about 25% of retirement income, meaning Social Security will generate approximately 30% of a retiree's income.
For younger workers (those born in the 60's or later), defined benefit pension plans are expected to only replace about 30% of pre-retirement income. Individual retirement accounts will make up about 35% of retirement income, leaving the last 35% to come from Social Security payments.
Retiring Without Pension Income
For older workers or workers close to retirement age, Social Security is expected to replace approximately 60% of your pre-retirement income. The other 40% will come from IRAs or personal saving and investments. However, members of this group need not assume they are doing better than the group with pension plans simply because Social Security provides a greater portion of their retirement income.
See, those without pension plans also contributed more towards Social Security, and less (clearly) to pension funds. As such, they will need to have invested more in IRAs or defined contribution plans in order to enjoy comparable living standards with those who participated in pension (defined benefit) plans.
Younger workers (those born during or after the 60's) should only expect Social Security to replace about 40% of their pre-retirement income. The remaining 60% will be provided by IRAs - either company sponsored or self-directed - and personal savings.
Social Security Retirement Income Varies With Average Income
Again, the income source allocations posted above are only approximations based on the typical retiree's situation. The percentages vary with lifetime income.
For instance, workers who have earned an average of $17,000 per year will receive roughly $9,400 per year from Social Security once retired... more than half of pre-retirement income. Workers who earn an average of about $90,000 per year will only draw about $24,000 per year from retirement..... or 28% of pre-retirement income.
All workers should understand this basic payout structure, and discuss retirement income options with a qualified professional before retirement age is met.
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