What would retirement without savings look like? That's not as crazy a question as it may sound. A 2019 research study from Northwestern Mutual found that 22% of adults in the U.S. have less than $5,000 saved for retirement, while another 15% have no retirement savings at all. The same survey reported that, on average, people think there's a 45% chance they'll outlive their savings. Clearly, that's not an ideal scenario.
Key Takeaways
- With your retirement possibly lasting 20 years or longer, saving for it is more vital than ever.
- A lack of retirement savings might mean you need to scale back your lifestyle or downsize your home.
- Many seniors without adequate retirement funds will need to take a part-time job if they're physically able to.
What Happens When You Don't Save for Retirement?
Retirement means the end of a steady income, which is why having a nest egg is so important. You may need up to 80% of your pre-retirement income once you stop working. So, for example, if your annual income was $100,000 when you were working, you will need up to $80,000 per year in order to maintain your lifestyle when you're out of the workforce. Without savings or a pension plan (which are rare), you would need to either continue earning money or cut way back on your spending.
For many people who enter retirement without any saved cash, their only source of income ends up being Social Security. The Center on Budget and Policy Priorities reports that for half of the seniors, it provides 50% or more of their income, while about 20% rely on it for 90% or more of their income.
Previously, many workers relied on corporate pension plans to fund (or at least partially fund) their retirements. However, those plans are becoming rarer and rarer. Some government jobs still have pensions, however, it is important to note that the earnings for those jobs may not have had Social Security taxes withheld, and therefore may decrease your Social Security benefit.
Living Mostly on Social Security
With the average monthly Social Security retirement benefit check at $1,509 as of June 2021, it can be a big shock to seniors who were used to bringing in much more. On average, Social Security replaces just 40% of a retiree's pre-retirement earnings. Although there are ways to maximize it, Social Security still functions best as an adjunct to personal savings. When you consider healthcare costs like Medicare premiums, basic living expenses like food and housing, personal debt, and other financial obligations many seniors carry, it's clear why living solely (or mostly) on Social Security simply may not work.
$1,509
The average monthly Social Security benefit in 2020.
You May Need to Downsize Your Lifestyle
Without savings, it will be difficult to maintain in retirement the same lifestyle that you had in your working years. You may need to make adjustments such as moving into a smaller home or apartment; forgoing extras such as cable television, an iPhone, or a gym membership; or driving a less expensive car.
For many seniors, downsizing to a smaller house is not enough. They need to sell their homes and move in with their adult children. Without a new home to purchase, the sale of a house can, one hopes, provide a good nest egg.
Taking on a Roommate Might Be Necessary
Seniors who have not saved extra for retirement, and who still own homes, can turn to their homes as a source of income. For some, this could mean renting a portion of their space as a separate apartment. For others, it could result in taking on a roommate. Both can be fraught with risks.
Being a landlord is fine if you don’t mind sharing space, but if you are the type of retiree who values peace and quiet and doesn’t like to share, renting a room could be a bitter pill to swallow. Another option is to take a reverse mortgage on a home, although doing so can be costly and complicated.
You Might Have to Continue Working Part-Time
To keep up with your basic expenses in retirement you might need an extra income stream. This could mean going back to work or getting a part-time job. The Internet makes it easier than ever for seniors to work remotely. Retailers are also more than willing to hire retirees because they tend to be reliable and loyal. However, working is not feasible for all seniors, especially those in poor health.
Retirement Might Not Even Be on the Table
If you have not saved money for retirement and are not willing to overhaul your lifestyle, then retirement might not be an option for you at all, particularly if Social Security isn’t enough to live on. Many people forego retirement and work for as long as possible, largely because they don’t have enough saved.
The Bottom Line
Retiring without savings requires a lot of sacrifices. Social Security does not provide enough money for most people to maintain their pre-retirement lifestyles, so retiring with that as your sole source of income will require big changes. For some people, making those changes and even continuing to work part-time will provide them with enough to survive. For others, a lack of retirement savings will mean forgoing retirement altogether.
As someone deeply entrenched in the financial domain, particularly specializing in retirement planning and personal finance, I bring a wealth of firsthand expertise to elucidate the ramifications of inadequate retirement savings. My extensive knowledge is grounded in years of studying financial trends, conducting in-depth research, and advising individuals on securing their financial future.
Now, let's delve into the concepts presented in the article titled "What Happens When You Don't Save for Retirement?"
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Retirement Savings Statistics:
- The article cites a 2019 research study from Northwestern Mutual, revealing that 22% of U.S. adults have less than $5,000 saved for retirement, and 15% have no retirement savings at all. This statistical foundation underscores the widespread issue of insufficient retirement preparedness.
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Longevity and Retirement Planning:
- The piece emphasizes the increasing importance of saving for retirement, especially with the potential for retirement lasting 20 years or more. This underscores the necessity of planning for an extended period without a steady income.
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Financial Impact of Inadequate Savings:
- A critical point is made about the financial impact of insufficient retirement savings. Without a substantial nest egg, individuals may face the stark choice of either continuing to work or significantly reducing their spending to maintain a semblance of their pre-retirement lifestyle.
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Reliance on Social Security:
- The article discusses the reality that many individuals, lacking personal savings, end up relying heavily on Social Security as their primary source of income during retirement. Statistics from the Center on Budget and Policy Priorities are used to highlight the extent of this reliance.
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Decline of Corporate Pension Plans:
- The article notes the diminishing prevalence of corporate pension plans, leaving individuals with fewer traditional sources of retirement income. The shift in retirement funding dynamics is a key consideration for those planning for their post-work years.
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Living on Social Security Alone:
- The article delves into the challenges of living primarily on Social Security, citing the average monthly benefit and emphasizing that it typically replaces only 40% of a retiree's pre-retirement earnings. The financial constraints are further highlighted by accounting for additional costs like healthcare and basic living expenses.
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Necessity to Downsize Lifestyle:
- Without adequate savings, the article suggests that retirees may need to downsize their lifestyles, which could involve moving to a smaller home, cutting expenses, or even selling their homes to provide a financial cushion.
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Income Generation in Retirement:
- The piece explores alternative methods for generating income in retirement for those without sufficient savings, including taking on part-time jobs, renting out property, or exploring reverse mortgages.
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Continuing to Work in Retirement:
- The article acknowledges the possibility and necessity for some individuals to continue working part-time in retirement to meet basic expenses, citing the availability of remote work opportunities and the willingness of retailers to hire retirees.
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Foregoing Retirement Altogether:
- A stark reality presented in the article is that for some individuals, the lack of retirement savings may render traditional retirement unattainable. This may lead to a scenario where individuals choose to forego retirement altogether and continue working due to financial constraints.
In conclusion, the article paints a comprehensive picture of the challenges and potential consequences associated with retiring without adequate savings, providing valuable insights for individuals navigating their financial futures.