The squeeze is on for representative middle-income retirees. Most are living on little besides Social Security and don't have much flexibility in their retirement finances, according to a series of advisory profiles prepared by the Society of Actuaries (SOA). Couples are better-positioned than single retirees, who are more exposed to unexpected retirement expenses, particularly for healthcare. Here are details of three SOA profiles for middle income retirees—a couple, a man, and a woman, all age 70.
[See 10 Costs That Could Increase in Retirement.]
There are common SOA assumptions underlying the profiles:
• Retirement age and the age of taking Social Security are both 66.
• Current income includes earned income, Social Security benefits, defined benefit pension income, required minimum distributions, and investment income.
• Financial assets are assumed to be 75 percent tax qualified (401(k)), and 25 percent after-tax savings.
• Social Security benefits are based on a single wage earner, with recognition of spousal benefits.
• Target retirement living expenses are assumed to be 80 percent of preretirement income. Expenses include insurance premiums and uncovered health care costs.
• For those who are already retired, target retirement living expenses are 90 percent of those for preretirees. These may exceed the current income of the retirees, but the analysis provides indications of the amount of additional income or the amount of additional assets that would be needed to support this higher standard of living.
• Essential living expenses are limited to the range of $25,000 to $35,000 for single households and $40,000 to $60,000 for married households.
• Discretionary living expenses are the excess of target expenses over essential expenses, but in no case less than $5,000.
• Defined benefit pension or other earned income is estimated at zero percent, 20 percent, and 40 percent of preretirement income, to provide a range of possible situations.
• Emergency funds are recognized at 50 percent of annual essential required income.
• Net after-tax assets assume taxes at 15 percent on taxable distributions and no tax on sale of a residence.
[See Retirement Advice for Upper-Middle-Income Preretirees.]
Profile 1: Couple
Current income: $45,000
Financial assets: $100,000
Nonfinancial assets: $185,000
Net after-tax assets: $274,000
Essential retirement income needed: $54,000
Discretionary expenditures: $5,000
Additional emergency fund: $27,000
Social Security income: $38,000
Defined benefit pension or earned income: $27,000 or $14,000 or $0
Amount needed currently: $61,000 or $241,000 or $434,000
Advisory Summary
• The current income of $45,000 is less than the targeted expenditures and indicates that the retirees are living on little more than Social Security.
• The $274,000 of net assets would be sufficient to cover the net retirement and emergency fund needs for the targeted expenditures only if there were additional income such as pension or earned income.
• It will be necessary to extract value from the nonfinancial assets (borrowing against or selling a home, for example) unless there is a significant additional source of income.
• Social Security income covers most essential expenses and the financial assets are limited; consequently, an annuity income to cover essentials may not be practical.
• Nonfinancial assets (home equity) can be relied upon for emergency funds.
• The amount of financial assets suggests that long-term care insurance may be uneconomic and that Medicaid may need to be relied upon for long-term care expenses after savings are depleted.
• Appropriate assets to consider in some combination, based on the limited amount of the financial assets, include:
• Low-risk, simple investments and investment approaches: certificate of deposit, U.S. government bonds, money market fund, fixed deferred annuity, home equity loan, under appropriate circumstances.
• Low-risk, more complex investments and investment approaches: TIPS, equity-indexed deferred annuity, reverse mortgage, under appropriate circumstances.
• Medium-risk, more complex investments and investment approaches: mutual fund or variable annuity invested in bonds or with a guarantee.
• Medium-to-high-risk, more complex investments and investment approaches: balanced mutual fund or variable annuity.
[See Retirement Advice for Middle-Income Preretirees.]
Profile 2: Single woman
Current income: $18,000
Financial assets: $45,000
Nonfinancial assets: $85,000
Net after-tax assets: $124,000
Essential retirement income needed: $22,500
Discretionary expenditures: $5,000
Additional emergency fund: $12,000
Social Security income: $15,000
Defined benefit pension or earned income: $10,000 or $5,000 or $0
Amount needed currently: $58,000 or $132,000 or $206,000
Advisory Summary
• The current income of $18,000 is less than the targeted expenditures and indicates that the retiree is living on little more than Social Security.
• The $124,000 of net assets would be sufficient to cover the net retirement and emergency fund needs for the targeted expenditures only if there were additional income such as pension or earned income.
• It will be necessary to extract value from the nonfinancial assets unless there is a significant additional source of income.
• Social Security income covers much of the most essential expenses and the financial assets are limited; consequently, an annuity income to cover essentials may not be practical.
• Nonfinancial assets (home equity) can be relied upon for emergency funds.
• The amount of financial assets suggests that long-term care insurance may be uneconomic and that Medicaid may need to be relied upon for long-term care expenses after savings are depleted.
• Appropriate assets to consider in some combination, based on the limited amount of the financial assets, include:
• Low-risk, simple investments and investment approaches: certificate of deposit, U.S. government bonds, money market fund, fixed deferred annuity, home equity loan, under appropriate circumstances.
• Low-risk, more complex investments and investment approaches: TIPS, equity-indexed deferred annuity, reverse mortgage, under appropriate circumstances.
• Medium-risk, more complex investments and investment approaches: mutual fund or variable annuity invested in bonds or with a guarantee.
• Medium-to-high-risk, more complex investments and investment approaches: balanced mutual fund or variable annuity.
Profile 3: Single man
Current income: $25,000
Financial assets: $42,000
Nonfinancial assets: $88,000
Net after-tax assets: $123,000
Essential retirement income needed: $30,000
Discretionary expenditures: $5,000
Additional emergency fund: $15,000
Social Security income: $18,000
Defined benefit pension or earned income: $15,000 or $7,000 or $0
Amount needed currently: $48,000 or $164,000 or $266,000
Advisory Summary
• The current income of $25,000 is less than the targeted expenditures and indicates that the retiree is living on little more than Social Security.
• The $123,000 of net assets would be sufficient to cover the net retirement and emergency fund needs for the targeted expenditures only if there were additional income such as pension or earned income.
• It will be necessary to extract value from the nonfinancial assets unless there is a significant additional source of income.
• Social Security income covers most of the most essential expenses and the financial assets are limited; consequently, an annuity income to cover essentials may not be practical.
• Nonfinancial assets (home equity) can be relied upon for emergency funds.
• The amount of financial assets suggests that long-term care insurance may be uneconomic and that Medicaid may need to be relied upon for long-term care expenses after savings are depleted.
• Appropriate assets to consider in some combination, based on the limited amount of the financial assets, include:
• Low-risk, simple investments and investment approaches: certificate of deposit, U.S. government bonds, money market fund, fixed deferred annuity, single premium immediate annuity, home equity loan, under appropriate circumstances.
• Low-risk, more complex investments and investment approaches: TIPS, equity-indexed deferred annuity, reverse mortgage, under appropriate circumstances.
• Medium-risk, more complex investments and investment approaches: mutual fund or variable annuity invested in bonds or with a guarantee.
• Medium-to-high-risk, more complex investments and investment approaches: balanced mutual fund or variable annuity.
[See 10 Essentials for Successful Retirements.]
Twitter: @PhilMoeller
Reader Comments Read all comments (2)
jasonjohnson833 of CA 8:40AM May 29, 2012
Jonathan Edelfelt of TX 11:01AM December 03, 2010