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Expectation vs Reality: Retirement Income Sources

It may come as a surprise to some, but the entire concept of retirement is relatively new and is really only made possible due to the industrial revolution. Before the Industrial Revolution, most people worked until they were no longer physically able to, and they lived in extended family households where older members would be cared for by younger family members. The idea of retiring from work and living off of savings or a pension is a more modern concept that emerged in the late 19th and early 20th centuries as life expectancies increased and social safety nets were established, such as the pension.

The first private pension in America was established in 1875 by none other than The American Express company. Still, it wouldn’t be until 1935 that there would be a federal retirement program that guaranteed a safety net for all. That program, known as Social Security, is now a mainstay of the American retirement landscape, with about 68 million Americans receiving monthly benefits in 2023 alone. 

Since the first private pension and federal retirement program, retirement has become a core section of the American dream – finally, after decades of hard work, you’ll finally have your time to relax on the sunny beaches of Florida (or that cabin in the woods in Alaska – whatever you want, it’s your retirement!). However, the reality of retirement often comes as a harsh blow to those who, for so long, looked forward to it. But why? One of the reasons may stem from the fact that Americans’ retirement income sources don’t correlate with their expected income sources and are subsequently incapable of maintaining their desired lifestyle.

Where will your retirement income come from?

Many, if not most Americans, would state that their retirement income would come from a workplace retirement plan. However, reality paints a stark contrast to these expectations. 

The Employee Benefit Research Institute asked the following question to over a thousand Americans saving for retirement and a thousand already in retirement: 

“To what extent do you expect the following will be/ is the following a source of income in retirement?”

Worker Expectations for Sources of Income in Retirement vs. Retirees' Actual Income Sources

Across the board, Americans severely misjudge their major sources of retirement income; they downplay the importance of Social Security while placing too much emphasis on their workplace retirement savings, IRA savings, and personal savings

Why the disconnect between expectation and reality? 

Americans Retire Earlier Than Expected

Again, we look to the EBRI 2023 Retirement Confidence Survey to help us untangle things. 

Worker Expectations for Sources of Income in Retirement vs. Retirees' Actual Income Sources

  • The median age workers expect to retire is 65.
  • The median age retirees actually retired is 62.

As we can see, many Americans expect to retire later than they actually do, meaning they have fewer years to put into their retirement and personal investment accounts, leading to an eventual overreliance on Social Security benefits to compensate for the gap. 

In fact, many Americans retire before Social Security even kicks in, meaning they’re winding down their retirement assets before they can even take a Social Security check. Instead of getting years of extra savings put into their retirement accounts by working and those vital extra years of compound gains, Americans are retiring early and draining their savings.

Americans Work Less Than Expected

Retirement doesn’t have to be the end of work altogether. There are ample opportunities to continue earning in your golden years, such as starting a small business or working part-time at a less stressful job than that corporate career ladder you climbed over the decades. Indeed, many Americans plan on working in retirement to supplement their retirement income. However, it seems that many don’t keep their word, even if they fully intended to do so. 

Worker Expectations for Working in Retirement vs. Retiree Experiences

Again, the Retirement Confidence Survey reveals an astonishing gap between expectation and reality over the years. While this might seem to suggest that Americans plan on working but simply change their mind, there may be other explanations. Frequently, you don’t have a choice. 

A Transamerica Center for Retirement Studies survey reveals that 56% of retirees retired sooner than planned – for various reasons – but the king of reasons was health reasons. Nobody plans on becoming disabled or too ill to work, but it unfortunately happens quite often, making up about 45% of those who retire early. 

Next up was employment reasons, with 29% leaving their company sooner than expected due to organizational changes and layoffs/dismissals. Unfortunately, we all know it is difficult for older Americans to get hired, leaving many close to retirement age in the proverbial dustbin whether they like it or not. 

Another major cause of early retirement was family reasons, such as having to become the caregiver of a loved one, which stood at 12%. Finally, how many retired early because they simply felt they had the financial means to do so? An underwhelming 17%. Let’s emphasize that ‘felt’ part. In case you were wondering why those figures add up to more than 100%, it’s because surveyees could select all that apply. So, if someone lost their job but still felt financially able to retire, they could choose both reasons as their early retirement.

Retirement is Complicated

Retirement is wrought with risks to your savings that could see you relying on Social Security more than you plan on. Inflation, poor market returns, inadequate tax planning, healthcare expenses, and a longer lifespan can all combine to create a financial disaster. With so much at stake, why leave your financial future to chance when a skilled financial advisor can help you reduce each of these risks (besides the longer lifespan, that is!)?

Social Security is Less Than You Think

Social Security, in even the best-case scenario, is not a jackpot. The highest possible monthly payout a person can get in 2024 at age 70 is $4,873 (minus tax). That may be enough for some people, but for many, it won’t come even close. If you have a comfortable lifestyle today and want an even better lifestyle in retirement when you finally have the time to do all those things you’ve dreamed of, it’s absolutely vital to not depend on Social Security and instead take concrete steps to generate as much savings as you can, while you can, in a tax efficient manner. 

Final Thoughts

While retirement can indeed offer the rest and relaxation one expects after years of hard work, that shift from expectation to reality—particularly regarding retirement income—can be significant. An unexpected early retirement (or even a planned early retirement), unexpected life events, and a misjudgment of the savings needed can lead to an increased dependence on Social Security, which likely will fall way short of providing the lifestyle you deserve! 

Our (very general) advice? Start saving early, take care of your health, work longer to take the pressure off of your savings, maximize Social Security by delaying benefits; and to optimize it all and bring it all together, sit down with a team of financial professionals who can get you on the path to long-term financial success and the retirement of your dreams. If that latter part sounds appealing to you, you can get started by clicking the button below!

For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Certain information is based on third-party data and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. The scenario mentioned in this presentation is not an actual client experience. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this presentation.

About the Authors

  • Douglas Walters

    Doug is the Managing Partner of Walters Strategic Partners, LLC, a licensed Registered Investment Advisory firm. Doug is a licensed Certified Public Accountant (CPA) in the state of Florida and holds a Series 65 Investment Advisor Representative securities license. He is also a member of the AICPA. With over 28 years of experience as a CPA, he believes investment decisions should be based on decades of peer-reviewed research rather than relying on the latest “hot tip” from media outlets. This empirical evidence puts the science of investing to work for his clients.

  • Jose Joia

    Jose M. Joia is a Wealth Advisor at Walters Strategic Advisors, LLC. As a member of the team, Jose’s responsibilities involve comprehensive wealth management, planning and customer service. He has over 6 years of industry experience specializing in planning and solving unique issues his clients encounter. Jose has experience serving individual clients, business owners and non-profit organizations.

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