Affluent, comfortable, or average: What will your retirement look like?Affluent,comfortable,oraverage:Whatwillyourretirementlooklike?

 

Key takeaways

• A research institute identified retirees’ lifestyles based on their finances.
• Knowing these groups can help you see where your retirement might fall, determine targets to strive for, and be realistic about your future.
• All groups worry about spending down their assets due to unexpected expenses. Insurance could be a way to prepare.

 

What will your life look like in retirement? The Employee Benefit Research Institute (EBRI) says the answer largely depends on how well you’re able to prepare financially.

EBRI recently studied current retirees in five “lifestyle” groups: affluent, comfortable, average, struggling, and just-getting-by. As the names suggest, people in the last two categories could face significant financial challenges and limits in retirement. But assuming you’ve taken (or plan to take) full advantage of opportunities to fund your future, chances are you’re headed for an average, comfortable, or even affluent lifestyle after work.

Here’s what to expect and how to help improve your lot.

 

The EBRI report shared the average annual income and financial assets of the three groups. These categories can help you get a feel for where your future retirement will fall and could motivate you to reach a higher group with your savings.

Average lifestyle

Those in the average category had $99,000 or less in assets and income between $40,000 to $100,000 a year. They were a little less confident in their financial position than the other two groups, but over half still said they had enough to live on comfortably.

These retirees commonly mentioned using pensions and Social Security as their top sources of income—but not savings, since they didn’t have as much. Nearly half still had a mortgage, while 40% had paid off their homes and only 12% rented. For investing, this group saw their savings grow by $12,000 since they first retired.

Comfortable lifestyle

These retirees had between $99,000 to $320,000 in financial assets saved up, and their annual income ranked in the middle of the five groups EBRI studied. Most of those in the comfortable category felt they had enough saved up or even more than they needed.

Comfortable respondents primarily cited using Social Security and savings from retirement plans like individual retirement accounts (IRAs) or 401(k)s. This group didn’t commonly report using pensions. 37% still had a mortgage and 53% had paid off their homes, while 9% were renters. This group also saw their savings grow by $23,000 on average since retiring.

Affluent lifestyle

These retirees had over $320,000 in financial assets, income above $100,000 and said they felt they’d saved up enough or even more than they needed. The affluent had the most variety for their income streams, citing pensions and personal savings as the top strategies. The majority had paid off their homes and saw gains in their investments of $68,000 since they first retired.

Affluent respondents’ broad variety of income streams seem to suggest that building a more diverse portfolio and retirement plan can put you in a stronger financial group. However, it could also be a chicken and egg situation—people with more resources can set up more sources of income.

Financial lessons learned

EBRI’s survey shows that owning a home is a good benchmark for a solid retirement, as those struggling or just getting by were much more likely to be renters. For investing, most people in all three groups said that their financial assets had grown since they first retired. This could reflect the recent strong stock market performance, but it also shows that retirees continue to invest for growth and don’t move all their savings into cash when they stop working.

Both affluent and average retirees mentioned pensions as a top source of income, which could differ for people retiring in the future. Pensions are much less common today than in the past, as companies have moved to offering 401(k)s and other workplace benefits instead. Only about 4% of private-sector employers have pensions, versus 60% in the 1980s.¹

If you’d like something similar to a pension, consider using part of your retirement savings to purchase an annuity. These contracts turn your money into future payments that may be guaranteed to last for the rest of your life.

Spending hesitancy

When asked about their spending plans, the majority in all three groups said their goal is to not spend down their assets or to only spend a little, to preserve most of their savings. The top reasons for not spending:

• They’re worried about a big unforeseen cost in the future.
• They didn’t think spending down their assets was necessary to maintain their lifestyle.
• They want to leave an inheritance.

Surprisingly, running out of money wasn’t a common reason why retirees were hesitant to spend. This could reflect their relatively strong financial positions and that they’ve been growing their assets since retirement.

One possible downside of this caution is, retirees don’t spend money when they’re young and healthy enough to enjoy it, such as on travel or hobbies. It becomes a balancing act, and one way to know whether they’re being too cautious is by budgeting for possible future expenses.

Future concerns

In terms of unforeseeable expenses, long-term care should be on the radar for those in retirement. This includes the cost of staying in a nursing home/assisted living facility or paying for a nurse at home. Medicare generally doesn’t cover these expenses.

The cost of a semiprivate room in a nursing home averages a little over $82,000 per year, while an assisted living facility is $43,536 per year, according to the U.S. Department of Health and Human Services' Administration for Community Living. It estimates that 70% of retirees will need some type of long-term care, with women needing 3.7 years of care on average and men needing 2.2 years.

To cover these costs, you could purchase a long-term care insurance policy. Another option is to buy life insurance with a long-term care rider, as this would cover both your insurance needs and create a future inheritance. Lastly, you could budget part of your savings for this future cost.

While those surveyed weren’t worried about outliving their money, this could be a concern given today’s low interest rates for income investments. Better health care is helping people live longer on average too. Converting part of your savings into an annuity could be a solution. These contracts generate income you can’t outlive, so you don’t have to be overly cautious with savings at the start of your retirement.

What you can do next

Review your retirement savings to see which group you’re on track to reach. No matter where you think you stand, it’s wise to make an appointment with a financial professional to check how you’re doing with your plan and where you can improve.

 

¹ “Ultimate Guide to Retirement: Just How Common Are Defined Benefit Plans?,” CNN Money, accessed Sept. 8, 2021 (money.cnn.com/retirement/guide/pensions_basics.moneymag/index7.htm)

 

David Rodeck is a freelance writer specializing in making insurance, investing and retirement planning understandable.

 

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