Planning for retirement is often centered around saving in IRAs and 401(k)s. While these accounts are valuable, recent research reveals they play a smaller role than expected in retirees’ overall income. Let’s dive into the findings and their implications.
Insights from the 2024 EBRI Spending in Retirement Survey
The Employee Benefit Research Institute (EBRI) conducted a survey of 3,600 American retirees aged 62-75, unveiling surprising statistics:
- IRAs: Only 20% of retirees use IRA income, which makes up about 10% of their total income.
- 401(k)-Style Plans: About 17% benefit from 401(k)-like plans, contributing an average of 15% of their income.
Where Do Retirees Get Most of Their Income?
Retirement income isn’t just about IRAs and 401(k)s. Other sources play significant roles:
| Income Source | Percentage Receiving | Average Contribution |
|---|---|---|
| Social Security | 92% | 40% |
| Pensions | 56% | Varies |
| Interest, Dividends, or Rental Income | 42% | Varies |
| Wages, Salaries, or Self-Employment | 32% | Varies |
| Cash Transfers (excluding Social Security) | 9% | Varies |
Social Security alone replaces about 40% of pre-retirement income, far from the recommended 70-80%.
The Gap Between Income and Expenses
Retirees face a common challenge: income often falls short of expenses.
- Median Annual Income: $50,290 for Americans aged 65 and older.
- Average Annual Expenses: $57,818, creating a gap that stresses financial stability.
- Social Security Benefits: With an average of $1,900 per month, it’s clear Social Security isn’t enough for most retirees.
Financial Challenges in Retirement
The limited contribution of savings accounts like IRAs and 401(k)s has several effects:
- Struggles with Basic Expenses: Nearly 45% of retirees aged 60+ have difficulty meeting essential needs.
- Projected Shortfalls: By 2040, an estimated 32.6 million households may face a $7,050 annual gap between income and living expenses.
Why IRAs and 401(k)s May Not Be Enough
While IRAs and 401(k)s offer tax benefits and growth opportunities, they shouldn’t be the sole strategy for retirement planning.
Diversify Your Retirement Income
Here’s how retirees can strengthen their financial security:
- Explore Other Income Streams: Include pensions, rental properties, or part-time jobs.
- Financial Planning: Consult a financial advisor to tailor a strategy to your goals.
- Review Plans Regularly: Adjust plans based on market changes and personal circumstances.
Conclusion
The revelation that IRAs and 401(k)s provide less than 20% of retirees’ income emphasizes the need for a diversified retirement plan. Social Security and other sources must complement these savings tools to ensure a comfortable lifestyle post-retirement. By engaging in proactive planning and leveraging multiple income streams, retirees can navigate these challenges and achieve long-term stability.
FAQ’S
1. How much do IRAs and 401(k)s contribute to retirement income?
IRAs and 401(k)s typically contribute less than 20% of retirees’ total income. On average, IRAs account for about 10%, while 401(k) plans contribute around 15%.
2. What are the main sources of retirement income?
The primary income sources for retirees are Social Security (40%), pensions (56%), and interest or rental income (42%). IRAs and 401(k)s play a smaller role, contributing much less.
3. Why do retirees struggle with covering expenses?
Many retirees face financial difficulties because their income doesn’t meet their living expenses. The median income for those aged 65+ is $50,290, while average expenses are about $57,818, creating a shortfall.