Can You Afford to Retire on 70% of Your Income?

Guest: Mike Sante

Guest: Mike Sante

Mike Sante is the managing editor of Interest.com, a website that helps consumers make smart financial decisions. He previously spent 13 years as the business editor for the Detroit Free Press. He joins me to explain what retirees are up against when it comes to retirement income.

Listen to the podcast to learn more, including your options if your retirement income isn’t stretching far enough.

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Excerpt from this interview


Gerri: Low interest rates are great for borrowers, not so great for savers and retirees. Joining me to explain what's going on and what options there are for retirees who are often living on a fixed or limited income is Mike Sante, he is the Managing Editor for Interest.com. Mike, I know it has been a very rough few years for many people especially for seniors and retirees who are finding their money is not going as far as they’d hope. How big is the problem?

Mike: Gerri, if you go to a financial advisor and you say what do I need to retire safely and securely, they’ll generally tell you that you need to be able to replace 70% of your pre-retirement income after you retire. Now that can be from any number of sources, obviously Social Security, it can be from traditional defined benefit pensions, some of that money obviously can come from savings and the amount you withdraw from savings. There’s lots of different options.

And what we wanted to know was how are today's retirees doing with respect to that 70%? Are the households that are retired today, are they making 70% of what the pre-retirement households are making? What we found is that they’re not. On a national average, households headed by people 65 and older only make about 57% of what the households in that pre-retirement cohort, which would be the households headed by people 45 to 64, make. And probably most would say that's not enough.

Gerri: Yes, 57% is a much different picture than 70% that a lot of people were aiming toward. What do you attribute to the gap there?

Mike: The key, it’s interesting if you look at it, there are two states in the country where the retired population actually does make the household 70% of what the pre-retired population makes. The two states are Hawaii and Nevada.

There are a couple of things that some of those states have in common that’s good. Florida, by the way, is one of those states. What helps to makes its average a little higher than the average, considerably higher in fact, is that those are destination states for non-retirees. People who have enough money, if they can retire out of the cold, out of the Northeast, out of places like the upper Midwest and come down where it’s warm, bring their money with them.

And we thought that explains part it. In fact, we thought that probably explained most of it. But when we started talking to people in Hawaii they said don't forget another important factor. They said Hawaii has a very strong union culture and the people who live there and work there are more likely than most to have a defined benefit pension.

Now if you’ve lived and worked your whole life in Hawaii, you’re unlikely to retire and move to say Missouri. You’re probably going to stay there and those people stay there with their pension checks and that is a huge help in boosting retirement income in places like Hawaii, and in fact Nevada, which also has a strong union culture, and bringing those retired incomes up.

It used to be - and probably a lot of your listeners appreciate this more than most - as recently as 1998 more than half of all seniors sixty and older were collecting some kind of defined benefit pension check, a traditional pension check that they worked years for as part of their benefit. By 2010, that number was down to 43% and it's falling as companies are closing their traditional pension benefit plans and pushing people into a defined contribution plans such as 401(k)s.

What happened for the current group is that we are seeing as years go by is fewer and fewer people having defined benefit pensions and the checks that they’re getting are getting smaller because perhaps their defined benefit pension plan was frozen ten or fifteen years ago so they didn't have as many years of earnings that went into it. And they’re having to depend much more on their savings and they’re coming up a little short in their savings.

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