As a financial planner, I am often called on to help with retirement planning. At some point, when a person no longer wishes to work or is unable to work, he or she needs to have enough money to pay living expenses. Most retired workers have Social Security retirement benefits. However, even if you earn the absolute highest monthly amount possible because you earned the maximum in lifetime wages, the most you can possibly receive monthly from Social Security in 2016 is $2,639. Most people will receive much less. At the max amount of $2,639 per month (for one person), your individual yearly income would be about $30,000. According the Social Security Administration, the average monthly benefit for retirees in 2016 was $1,335 per month or $16,020 per year.[i] That amount is not very far above the 2016 Federal Poverty Line amount for one person of $11,880.[ii] For retirees with no savings and no pension, it would be tough to meet basic living expenses on Social Security income alone. Since fewer and fewer people are retiring with pension money, and the average person in his or her 80’s or 90’s would be hard pressed to find a job, there is little prospect for bringing in extra cash. That’s why financial planners work to encourage people to save for retirement during their working years even if it seems difficult or impossible to do so. Planning is just as important for people in blue collar jobs.  What are the key components of a good retirement plan?

 

• Monthly retirement income and expenses (from Social Security, pension, distributions from retirement savings, dividends, or part-time work)

• Retirement savings (from 401(k)s, IRAs, or general savings and investments)

• Housing (including possible nursing home care)

• Health insurance (Medicare after age 65)

• Legacy planning (leaving money to children or charities)

 

Retirement Income and Expenses

How will you support yourself when you no longer receive a paycheck? Where will the money come from each month to pay for a place to live, food to eat, medicine and medical care, and other basic living expenses? If you were to visit a financial planner, one of the key tasks you’d complete with your planner is an analysis of how much you currently have saved for retirement, how much you think you will need during retirement, and how much you should to save between now and retirement to get there. This exercise is a pleasant and reassuring one for wealthy people who earn high salaries and have the promise of pension plan money for the rest of their lives. It’s less so for the 90+% of the rest of the country whose salaries or wages are often not sufficient to support a comfortable lifestyle for themselves and their families today, much less save for retirement in a meaningful way to ensure sufficient retirement income to meet expenses in old age.

 

In the past, you might have counted on pension money to support you during your retirement years. My Nana lived to age 100 and was sent $226 per month for 40 years from her career in the meat department of Clemens Supermarket. The amount certainly was small, but it functioned as regular and reliable cash flow each month. Today, pensions are being phased out in the workplace, so few of us will receive regular payments from our former jobs when we retire. In my case, I never worked for a company that offered pensions, and it’s even more unlikely that my young adult kids will ever have the chance to earn a pension. In the past, when people only lived into their 60’s and companies weren’t subject to as many buyouts, it made sense to offer a guaranteed benefit lifetime pension to long-time workers who retired after years with the company. It makes much less business sense today in 2016. As people live well into their 80’s and 90’s and companies merge and change hands, company pension plans have become rare. The pension plan has been replaced by the company 401(k), which can be a useful retirement savings too, but as I discuss below, it offers fewer guarantees of solid income than pensions did.

 

So what can you do to make sure enough cash is coming in each month during your retirement years? Let’s talk about a few ideas:

 

• Working part-time

• Maximizing Social Security benefits

• Applying for government or charitable assistance

• Using a reverse mortgage

• Relying on dividends from investments

• Taking money from savings and investment accounts

• Collecting from your pension plan

 

[i] “Social Security Basic Facts.” Social Security Administration. 13 Oct. 2015. Web. 18 Apr. 2016. https://www.ssa.gov/news/press/basicfact.html.

[ii] “Annual Update of HHS Poverty Guidelines.” Federal Register. 25 Jan. 2016. Web. 18 Apr. 2016. https://www.federalregister.gov/articles/2016/01/25/2016-01450/annual-update-of-the-hhs-poverty-guidelines.