It's the great upside-down U. Those in the workforce are familiar with the typical earnings arc in America: You start out at the bottom, work your way up, then experience a rather significant downward trend in earnings once you hit your Golden Years.
The Census Bureau just came out with its most-recent report on income in America, and it supports this broad generalization. Last week, we investigated the different levels of income in America, and helped you figure out where you fell when compared to all other households.This week, we'll focus on earnings over time.
Here's what the data revealed about the median American household's income, based on the age of the primary breadwinner.
As you can see, there's a steep increase in earnings from your teens through your mid-fifties. Between the age of 25 and 54, the typical American household can expect to see its annual income increase by 30%. Clearly, that's very encouraging.
But what I think is worth noting is what happens after the typical American family hits its earnings peak.
A clear and present danger to your retirement
Between the mid-fifties and retirement age, household income plummets by almost 50%. Obviously, that's primarily the result of senior citizens exiting the workforce, and relying on a combination of retirement savings, Social Security, and a pension to fund their lifestyles.
A general rule of thumb states that if you can replace 80% of your pre-retirement income after leaving work, you'll be able to continue living the same lifestyle. I think this rule of thumb ignores those who find their own level of "enough" while saving and investing large sums of money. But admittedly, the vast majority of Americans spend the bulk of what they earn, and don't save enough for retirement.
If the typical American household is earning about $60,580 before retirement, it should hope to have about $48,500 in income -- from Social Security, pensions, retirement savings, and any other income streams -- post-retirement.
Clearly, that's not the case. The typical American family is falling well short of this standard -- by about 25%, or $12,000 per year. That means that, when retirement hits, senior citizens have to make drastic changes to their lifestyles in order to make ends meet.
That leaves Americans with two options
If you're looking at these numbers and starting to realize the trouble on the horizon, you have two options moving forward.
The first is to accept the fact that you'll never save enough for retirement, and plan your Golden Years accordingly. This would mean reducing your expenses drastically, and looking for additional revenue streams in "retirement." This can take the form of continuing your full-time job beyond the age of 65, or looking for part-time work where it is available.
This isn't as miserable as it seems, as continuing some level of employment can help ease one into retirement, while still providing exercise and social connections to remain vital beyond age 65. But I hope many more would consider the second option: get your spending under control now, and start investing the money you save immediately.
There's nothing more perilous to your retirement savings than lifestyle inflation: spending more and more every time you get a raise. If you aren't able to figure out what your own level of "enough" is -- a point at which your material needs are met, and further spending brings less and less long-term satisfaction -- you'll never get off the hedonic treadmill.
The magic of finding your level of "enough" is twofold. First, it reduces the amount of money you'll need in retirement to continue living the same lifestyle. And second, it gives you more money to save and invest in the stock market over the long run.
As you can see by looking at the graph above, too many Americans are realizing the truth of their retirement situation after it's too late. Don't let that happen to you. Cut the fat, save, and invest the difference. Your future self will appreciate it.
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