The Importance of Thinking Beyond Social Security

Securing a comfortable retirement demands more than just relying on Social Security benefits. While Social Security was never designed to be the sole pillar of retirement funding, various avenues exist for potential retirement income.

Acknowledging that Social Security alone falls short of ensuring a comfortable retirement is essential. Its intended purpose was to provide an average of around 40% replacement of pre-retirement income. As a result, people should consider looking into additional sources of income for their retirement.

The pursuit of alternative retirement funding options beyond Social Security is a shared concern among many Americans yet to retire. This sentiment is reflected in Schroders’s 2024 U.S. Retirement Income Survey findings.

So, where do additional funds come from?

#1 Savings: 

According to Schroders’ survey, 58% of respondents plan to rely on their savings to support retirement. Although this approach is commonly used, it may not be enough to supplement Social Security for most retirees.

The average balance in an American’s personal savings account is approximately $65,100 (excluding retirement plan funds), according to Northwestern Mutual’s 2024 Financial Planning & Progress study. It’s worth noting that individuals with substantial savings can skew these averages, and the median savings account balance for U.S. families in 2019 was just $5,300.

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#2 Workplace Retirement Plans: 

Around 53% of survey participants expect their employer-sponsored retirement plans to contribute to their retirement funding, including 401(k) and 403(b) plans. The fact that these plans are widely used by American employees is a clear indication of their popularity and prevalence.

Statistics from a 2021 U.S. Census Bureau survey indicate that nearly 35% of working-age Americans possess 401(k) retirement accounts. This percentage significantly increases with age.

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#3 Investment Income: 

Approximately 40% of individuals consider drawing from investment income outside their employer-sponsored retirement plans during their retirement years. Prominent among these options are Individual Retirement Accounts (IRAs).

Fidelity Investments reported an average IRA balance of $113,800 in the second quarter of 2024. Roth IRAs, which offer tax-free growth, are popular among younger Americans.

#4 Defined Benefit and Pension Plans: 

Schroders’ survey reveals that 20% of respondents anticipate receiving benefits from defined benefit or pension plans. However, this number is notably lower than the 57% of current retirees who currently enjoy pension income, per Federal Reserve’s data. This discrepancy highlights the decline of pension plans among employers.

#5 Rental Income: 

According to the Schroders survey, rental income is poised to contribute to retirement funds for 14% of Americans. Despite some cooling in the rental market recently, factors like increased interest rates and a persistent shortage of single-family homes could propel the use of rental income as a supplementary retirement funding source.

Crafting a Thoughtful Strategy: Perhaps the most concerning revelation from the Schroders 2024 U.S. Retirement Income Survey is that 49% of respondents lack a comprehensive retirement income strategy. To address this, prospective retirees can adopt a proactive approach:

  • If your employer matches contributions in a 401(k) plan, strive to contribute at least the matching amount.
  • Explore additional tax-advantaged retirement accounts like IRAs and maximize your contributions.
  • Consider the optimal retirement age, as delaying Social Security benefits can prevent reductions and increase potential benefits.

In summary, relying solely on Social Security won’t guarantee a comfortable retirement. Diversifying income sources is crucial. While pursuing alternative funding methods, it’s also important to strategically optimize Social Security benefits to minimize the supplementary income required for a satisfying retirement.