The odds of financial success in retirement for the typical American household are less than ten percent.
This is based on the financial profile of an American household that would be considered statistically average. We developed the financial profile of an average American retiree in a previous article (click here to read).
The summary of the financial profile of our hypothetical retiree--referred to as William--is as follows:
- William needs to generate $40,038 per year in after tax income to fund his household’s retirement income needs.
- William should plan on generating this level of income for 20 years.
- William has a $244,000 retirement nest egg that can be used to accomplish this financial objective.
The Long Odds of Retirement Sustainability
The likelihood that William can accomplish this financial objective are less than 1 in ten. Specifically, William’s “retirement sustainability” or probability of success is 8.4 percent.
Another way of looking at this result is by expressing the odds terms of the likelihood of failure. From this perspective, William has a 91.6 percent chance of running out of money during retirement.
The term retirement sustainability refers to the likelihood that William has enough savings ($244,000) to support his retirement income needs ($40,038). In other words, William’s retirement sustainability result (8.4 percent) represents the chance that his desired level of retirement spending will last throughout his expected lifetime.
Why are William’s Odds so Low?
William simply does not have enough savings to comfortably and confidently support his desired level of retirement spending.
In other words, the likelihood of funding $40,038 per year with $244,000 in savings is very low (8.4 percent) given William’s life expectancy and, subsequently, the expected length of his retirement.
William and his wife would have to roll the dice and get very lucky (they would have to hit that 1 in 10 chance) to make these retirement numbers work.
What If?
William’s retirement sustainability numbers are not cast-in-stone, but rather serve as an indication that some things need to change in order for William and his wife to have more confidence in their retirement plan.
There are many factors that affect William’s retirement sustainability figure such as:
- Desired retirement spending
- Retirement savings
- Health status
- Life expectancy
- Marital status
- Asset allocation or the composition of William’s investment portfolio
- The amount of income that William and his wife have from guaranteed sources such as annuities
The good thing is that many of the factors that affect retirement sustainability are within William’s control.
The retirement sustainability calculator that is available through Annuity Digest let’s us experiment with “what-if” scenarios to see the effects of changing some of these factors.
Stay tuned--we will start to explore some of these “what-if” scenarios in the next article in this series.
Are you interested in receiving receiving personalized retirement sustainability results? Click on the image below to access the free calculator and receive a custom retirement sustainability report.
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