Can You Get By on the Average Retirement Income?

Senior couple working in living room, with laptop on coffee table

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Everyone envisions something a little different for their retirement. One thing we all probably have in common, though, is the desire for financial security after spending decades in the workforce. But how do you know if you’ll have enough to retire?

Financial planners often recommend replacing about 80% of pre-retirement income. But the actual amount you need will depend on your standard of living, retirement goals, and whether you’re retiring with debt. We’ll explore all of that and more in this article. 

The Average Retirement Income in America

The average income for a household headed by someone ages 65 through 74 was $65,943 in 2019, according to the U.S. Bureau of Labor Statistics. But as individuals get older and move further into retirement, income tends to fall dramatically. For households headed by someone 75 or older, income was just $41,937, on average.

When it comes to retirement income, the average American should receive it from three main sources—Social Security, a defined benefit pension, and a contribution account—to reach “ideal” financial security, according to the National Institute on Retirement Security. However, findings from the Institute show just 6.8% of Americans receive income from all three sources, and a total of 40.2% receive income only from Social Security in retirement, as of January 2020.

Additional sources of income can include part-time work, side hustles, and less common sources like inheritances.

As of January 2021, the monthly Social Security benefit is $1,543—or $18,516 annually—after you account for the 1.3% cost of living adjustment that will add $20 to the average check this year. 

The way in which companies offer retirement security has also changed in recent years, with new hires being less likely to receive income from a traditional defined-benefit pension, according to data from insurance company Willis Towers Watson. Just 14% of companies on the Fortune 500 list offered a pension to new hires as of 2019, down from 59% in 1998. Defined-contribution plans, like a 401(k), are an increasingly common source of retirement income, as about 90% of employees are eligible to participate.

Typical Living Expenses in Retirement

The average annual spending for a household led by someone 65 or older is $50,220. But as with income, spending is significantly lower for older retirees. Households led by someone between the ages of 65 and 74 had average spending of $55,087 in 2019, compared to average expenditures of $43,623 when the householder was 75 or older.

Perhaps the largest cost seniors should prepare for is health care. A 65-year-old retired couple in 2020 will need an average of $295,000 for health costs in retirement, estimates from Fidelity suggest. That estimated cost is associated only with Medicare, and doesn’t account for expenses related to dental, vision, or long-term care. 

As health care costs will likely make up a large portion of spending in retirement, retirees should budget about 15% of pre-tax income for medical expenses. 

On the other hand, expenses tend to decrease during retirement. Housing costs are often cheaper for seniors because they’ve likely paid off their mortgage, downsized, or moved to a lower-cost area upon retirement. Plus, once you stop working, you won’t be expected to pay taxes on payroll or make retirement contributions. Expenses like food, transportation, and entertainment, though, usually don’t change much. 

What’s Your Standard of Living?

The actual amount of income you’ll need depends on your standard of living, or the degree of wealth and comfort available to an individual. If you can survive without a car and you don’t dine out often or pursue expensive hobbies, you may be able to get by on less than 80% of your pre-retirement income. If you want to travel, contribute to charity, or gift money, you’ll likely need to replace more. 

A standard rule of thumb is to use the 80% point as a guide, and then measure income, lifestyle, and predetermined health expectations to modify your retirement budget. You can estimate your costs using a retirement planning spreadsheet.

How to Bridge the Gap

The sooner you start thinking about your retirement goals, the easier it will be to create income sources to meet your needs. If you’re still years away from retirement, it’s best to take advantage of your company’s 401(k) match, as it’s a good way to start saving. If you don’t have access to an employer-sponsored retirement account or you have extra money to invest, try to max out traditional or Roth IRA contributions. No matter what stage of life you’re in, learning how to make a budget that fits with your lifestyle can pay off by lowering your expenses over time.

If you’re approaching retirement with a shortfall and are at least 50 years of age, take advantage of catch-up contributions from the IRS, if you can. In 2021, you can contribute:

  • Up to $6,500 to your 401(k) 
  • Up to $1,000 to your IRA
  • Up to $3,000 to your SIMPLE IRA, if applicable.

When you need more retirement income, you may consider claiming Social Security later in life, rather than when you’re eligible at age 62. Claiming Social Security at 70 years old, for example, can result in a monthly check that’s 77% more than the benefit you would get if you start receiving benefits at 62—a difference of $545 each month.

Saving pre-tax money in an HSA while you’re still working can be a good way to save for those inevitable medical expenses in retirement. Downsizing your home or supplementing your income with a part-time job are also options to consider.

Plan for Your Future

Investing for your future early always pays off because you get to take advantage of compound interest, and feel financially secure from an early age. But even if you’re getting a late start, you have options for generating more retirement income. Using catch-up contributions, delaying Social Security, and working part time are all good options for increasing your retirement income.