The Unexpected Shock of Retirement

Disclaimer: Views expressed in Bob’s Blog belong solely to the author and do not purport to reflect the opinions or views of the CAC Office in Aging or its staff. 

Here’s a startling fact.

Far Too Many People Cannot Afford Retirement.

Most expect their lives after they retire to be very similar to what their lives were like before they retired.

Too late, they find that’s not the case. They don’t have enough income to live as they did before they retired. They have to make cuts.

An Example – Tom and Sharon.

Tom was born September 10, 1954. He worked all of his life. Prior to his retirement he was making $50,000 a year.

Sharon was born on August 5, 1955. Prior to her retirement she was making $35,000 a year.

The companies they worked for did not have a pension plan for their employees. They did have 401K plans.

When he retired, Tom had $118,000 in his 401K. Sharon had $82,000 in hers. They sacrificed to accumulate that. They had no other savings.

They believed the $200,000 in their 401k plans would be their Fun Money Fund. They would just use it to travel, buy some of the things they always wanted and pay for any unexpected medical expenses that came up.

Tom’s monthly Social Security benefit is $1,911. Sharon’s is $1,494. Their total monthly income is $3,405. Annually they get $40,800 . . .

. . . 48% of Their Combined Pre-retirement Income

Tom and Sharon are shocked. How are they going to live on 48% of their income?

They suddenly realize the $200,000 in their 401k plans was not a Fun Money Fund. They will have to use money from it to supplement their income monthly. They also realize it had to last until they died. It also has to cover unexpected medical expenses if either one developed a serious illness.

Financial Planners say people should only withdraw about 4% of the money they have in savings annually to supplement their income. That way they won’t outlive it.

Those planners also say that to survive or even thrive in retirement, most people need to have an annual income equal to at least 70% of their income before they retired.

In Tom and Sharon’s case, 4% of $200,000 was $8,000. Adding $8,000 to $40,800, their annual income rose to $48,800. That was still only 57.4% of their income before they retired. What expenses do they have to cut to survive?

Here’s the sad thing . . .

. . . Tom and Sharon Are Better Off Financially Than Many Retirees in Knoxville and Knox County

The annual income of 10% of seniors in Knox County is below the poverty level. For an individual, that means their annual income is below $12,880. For a couple, their annual income is less than $17,420.

Another 26% of households headed by people 65 and older are ALICE households. These are households with income above the poverty level but not enough to pay for their minimum daily needs.

In 2018, annual income below $25,716 for a single older person and below $40,572 for a couple put them in the ALICE category.

The average person in Tennessee retires at age 64. . .

. . .They Can Expect to Live 12 Additional Years till Age 76

To live comfortably during that time, they should have at least $667,000 in savings. 4% of that annually would give them $26,680 a year or an extra $2,223 a month.

If Tom and Sharon had $667,000, their annual income would be $67,480. That is 79% of their pre-retirement income of $85,000.

The difference between $200,000 and $667,000 is huge.

There are several reasons people do not save enough for retirement during their working years.

• First, they may not be making enough money to save all they need. Also – their investment may never grow to the amount they need.

With many 401K plans, employees put 3% of their income into the plan. Some companies match that. Others don’t.

If a person is making $15 an hour and working 40 hours a week, they are putting $18 a week or $936 a year into their 401K. If the company matches the 3%, their investment is $936. The total is $1,872. At that rate, here’s what they will have down the road:

10 years – $18,720
20 years – $37,440
30 years – $56,160

It would be very difficult for these amounts to grow to $667,000 even with massive returns on the investment.

• Second, most people are not educated in financial matters.

They don’t check regularly to see what their monthly Social Security income will be or how much they will need to live comfortably.

They also have no idea when to start to save for retirement and how much to save.

• Third, most employees know how much of their pay is going into their 401k plans weekly or monthly. However, they don’t look at how their money is being invested.

They just assume the people running the plan are skilled at what they are doing and are investing it to get the highest return.

Money in these plans typically is invested in the company’s stock or mutual funds. Most allow the employee to choose what options to pick and how much to invest in each. Sadly, most don’t check to see if their investment is growing.

If the value of the company’s stock drops, they can lose not only any gain they have seen but also the money they invested.

The values of mutual funds can drop. Any gain in their investment can be wiped out as well as their investment itself.

As I mentioned earlier, people need about 70% of their pre-retirement income to live comfortably in retirement.

For Tom and Sharon, That Would Be $59,500 Annually (70% of $85,000)

We already saw that they are at $48,800. That’s $10,700 short. One of them would have to get a part-time job paying about $11 an hour to make up the short fall.

One problem here is they would need to work until they died. Many people in their late 60’s and early 70’s continue to work. Less people over 75 work. Rarely do we see a person in their 80’s or 90’s working.

A second problem is their hourly pay would have to increase with inflation. Right now, many are making $11 an hour. This is very low. Increases for inflation are rare.

Why Do Financial Planners Say Most People Need an Annual Income of at least 70% of What They Made Before They Retired to Survive or Even Thrive in Retirement?

The answer is in the expenses retired people have.

They have to pay a monthly premium for Medicare Part B. Most also get supplemental insurance to cover what Medicare Parts A and B don’t cover. There’s a monthly premium for this. If they want coverage for prescription drugs (Medicare Part D), there’s a monthly premium for that.

They also have to pay for any medical expenses Medicare and their insurance coverages don’t as well as for eye exams and glasses, dental work and hearing tests and hearing aids.

According to a study done in 2021 for the Senior Citizen’s League, the average Medicare recipient can expect to spend about $1,000 a month for these.

This is on top of their regular monthly expenses.

Second, the value of a person’s monthly Social Security check decreases. Social Security benefits are supposed to keep pace with inflation. However, they haven’t.

An analysis in 2020 showed that every dollar a person received in Social Security benefits in 2000 shrank to $0.67 in 2020.

Tom and Sharon’s combined monthly Social Security Benefit right now is $3,405. If the index is not changed and if they are both alive, their buying power in 20 years will shrink to $2,281.35.

Earlier I indicated the average person in Tennessee retires at age 64. They can expect to live 12 additional years till age 76.

On March 11, 2021, the CDC published a National Vital Statistics report. One section of this had tables showing how long males and females can expect to live in the United States and in each state. The data was as of 2018.

These tables showed life expectancy in Tennessee was the 47th worst in the country. Males can expect to live to 73 – females to 78.1. The average is 75.5.

Nationwide, the average for men is 76.3 and for women was 81.4.

Why is The Life Span for Both Men and Women Shorter in Tennessee Than That Nationwide?

Most probably many of the older people below the Poverty level or in the ALICE category are dying earlier than others.

They have to pick and choose which expenses they will pay for each and every month.

• Will they pay for the food they need for a balanced diet or do they get the prescriptions they need?
• If they cut back on prescriptions, do they cut their pills in half to last longer or do they take one every other day rather than daily?
• Do they go to their doctor regularly or only when their illness gets worse?
• When they develop a serious illness, can they afford to get the treatment they need for it?

Why Do So Many People in Knoxville and Knox County not Have Enough Money to Provide for Comfort in Their Retirement Years?

One reason is the pay they receive is much lower than that of workers in other parts of the country.

I already mentioned in 2018, annual income below $25,716 for a single older person and below $40,572 for 2 people 65 and older put the individual or couple in the ALICE category.

To earn $25,716 annually, a person has to make $12.36 an hour. To earn $40,572 annually, they have to make $19.51 an hour.

Quite a few people only make $11 to $12 an hour. How many people do you know who are making $19.51 an hour?

Recently companies have started to pay $15 an hour. Is this because Amazon is coming into the area?

Amazon has announced it will open 2 large facilities here – one in Alcoa and one in Knoxville. The starting pay will be $15 an hour at those. Are the existing companies being forced to raise their hourly pay to match Amazon so they won’t lose workers? The question arises why haven’t these companies raised their hourly pay before this?

Another reason is people are not trained in how to manage their money. Nor are they ever told how much they will need for retirement. Training in financial management needs to be taught to kids in high school. To catch up right now, we need to teach financial management to people in their 20’s and 30’s.

Unfortunately, it’s too late for those already retired. They need to find other sources of help. They may have to supplement the food they buy with that from Food Pantries. If they qualify, apply for SNAP benefits (food stamps). Can they qualify for TennCare? Are there other government programs that can help them?

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If you have any comments on what you have read in this post, please email them to me. Also – if you have any ideas about subjects you would like to see discussed in future posts, please send me an email and let me know. My email address is bob.ooablog@gmail.com.