Look under the hood of your retirement income portfolio!
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Many older workers don’t really know if their savings and Social Security are enough to support themselves in retirement. That’s because they haven’t taken the time to “look under the hood” and learn how much retirement income they might receive from Social Security and their investments and savings. Instead, they’re hoping that somehow things will just work out. But hope is not a good strategy!
If this sounds like you, here are two quick ways to determine whether or not your retirement resources could possibly support your retirement hopes.
Let’s start with Social Security.
To give you a very rough, ballpark estimate of the amount of Social Security income you might expect to receive, we’ll use the average income amounts from Social Security’s “Fast Facts and Figures” publication.
Here are the average monthly income amounts for new Social Security claims in December 2019 for various situations:
- Male retired workers: $1,671
- Female retired workers: $1,337
- Male spouses of retired workers: $673
- Female spouses of retired workers: $796
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Here’s how you can use these numbers, given your situation:
- If you’re single and have paid into Social Security (paid FICA taxes) for most of your life (35 years or more), then use the average amount for your gender to arrive at your total Social Security income.
- If you’re married and both you and your spouse have paid FICA taxes for most of your lives, then add up the average income amounts for retired workers to arrive at a very rough estimate of your household income from Social Security. For example, if both a husband and wife paid into Social Security for most of their lives, the rough estimate of their total monthly Social Security income would be $3,008 ($1,671 + $1,337).
- If one spouse didn’t pay into Social Security for most of his or her life, then add up the average amount for a retired worker and the average amount for the spouse of a retired worker. For example, if a husband paid FICA taxes for most of his life but his wife didn’t, then the estimated household income from Social Security would be $2,467 ($1,671 + $796).
Will your actual Social Security income be different from these estimates? Of course!
If you want a better idea of what your Social Security income will be, it’s best to determine an estimate based on the age at which you expect to retire and your actual wage history. And if you’re married, you’ll want to estimate the income your spouse will receive.
The best way to do this is to establish a “my Social Security” account at Social Security’s website. You can then generate an estimate of your Social Security income, using the history of your actual wages.
How much retirement income might your savings generate?
There are many viable methods you can use to generate lifetime income from your retirement savings, and each method has the potential to generate significantly different amounts of income. Here’s a very rough way to estimate your retirement income without needing to learn about these various methods right away.
Add up all the savings that you can use to generate income in retirement; be sure to include money in your IRA, your employer’s savings plan, and any long-term investment accounts you may have. If you’re married, add up similar amounts from your spouse.
Divide the total by 25, which is a rough estimate of the number of years your retirement income might need to last. The result will be a very, very rough estimate of your annual retirement income. You can further divide this result by 12 to estimate your monthly retirement income.
As an example, suppose that same married couple who estimated they’d get $3,008 from Social Security added up all their retirement savings, and the result was $300,000. After dividing this amount by 25, they’d get an estimated annual retirement income of $12,000. Then, by dividing this amount by 12, they’d get an estimated monthly retirement income of $1,000.
When you eventually retire, will your actual retirement income be different from your estimate? Of course! That’s because your retirement income will depend on a number of factors, including the type of retirement income generator you select, your age at retirement, and whether you’re married. As you prepare for retirement, your job will be to learn about the different retirement income generators, decide which generator might work best for you, and determine how much income you might expect to receive.
If you’re lucky enough to participate in a traditional pension plan, your plan will most likely offer an online pension estimator you can use to estimate your monthly income from that pension. (This step might take an hour or two—consider it as a very good use of your time to learn about such a valuable benefit.)
Adding it up
Now you’ll add up your estimated retirement incomes from these two sources (three if you’ll be getting a traditional pension) to get a rough estimate of your total retirement income. For example, if we continue looking at the married couple mentioned earlier where both spouses paid into Social Security for most of their lives and they’d saved $300,000, we’d discover that a rough estimate of their total monthly retirement income from Social Security and savings would be $4,008 ($3,008 + $1,000).
Once you’ve determined your own estimate, how does the amount compare to the monthly income you’re earning while working? If there’s a large gap between your current income and your estimated retirement income, then you have a planning challenge that needs your attention.
Please remember, this post just provides a way for you to get a quick, ballpark estimate of your retirement income. Hopefully it’ll serve as a wake-up call to look under the hood of your retirement finances! The fact is, you’ll feel more confident about your future if you take the time to learn about strategies to maximize your Social Security benefits and generate lifetime retirement income.
For more robust retirement reality checklists, please see my most recent books, Retirement Game-Changers and Don’t Go Broke in Retirement.