Despite a soaring economy and stock market, only a small percentage of older Americans—less than 7%—receive income from the most desired three sources: Social Security, a defined benefit plan and a defined contribution account.
That sobering finding can be found in “Examining the Nest Egg: The Sources of Retirement Income for Older Americans” released this week by the National Institute on Retirement Security (NIRS), a Washington, D.C.-based nonpartisan retirement security think tank.
The study also found that a full 40% of Americans rely solely on Social Security for income in retirement, a fact that has far-reaching policy and tax implications as lawmakers confront a looming Social Security shortfall.
“Protecting and expanding Social Security should be a top priority for policy makers interested in the financial security of America’s middle class and to keep them from falling into poverty,” said NIRS Executive Director Dan Doonan.
In fact, Social Security kept more than 7.5 million households out of poverty and reduced public assistance costs by $10 billion in 2013, the report found.
“But Social Security alone is not enough to provide a secure retirement,” Doonan cautioned. “The most surefire way to achieve a secure retirement is to have income from all three sources. But this just isn’t the case for most older Americans today, and we are on a treacherous path for the future with dwindling pensions and proposals to cut Social Security.”
This is especially true since so few Americans have defined benefit plans, and the number of those receiving pension distributions in retirement is dwindling. Without income from DB pension plans, the number of poor older households would have increased by 19% to more than 4 million households, the study estimated.
While advisor clients are far more likely to be on target to live a prosperous (or at least financially stable) life in retirement, their aging parents, adult children and extended family members—all of whom may wind up being the clients’ financial responsibility, may not be so strategic about their own retirement income plans.
Middle-class individuals without these three sources of income are far more prone to economic hardship and even poverty, the study found.
Many financial planners recommend at least a 70% income replacement plan for retirees, while others say this should be even higher given people’s longer life spans and rising health costs.