TMF took data from a GAO report that includes the current financial status of households between the ages of 55 and 64. (A link to the report is provided in the TMF column.) They found that 41% of the households in the study had been unable to save for retirement directly though many of those have homes with paid-off mortgages and about a third have pensions.
TMF provided the following graph in that column, showing the distribution of retirement savings within that 55-64 age group. Keep in mind that some of the group have nearly reached retirement age while the youngest have another decade or more to save.
Ignoring the 41% of households with no savings and considering only the 59% with some savings, the Motley Fool produced the following chart showing median savings of just over $106,000.
Wade Pfau’s Retirement Researcher website includes a dashboard that shows the current payout of annuities, TIPs bonds, systematic withdrawals, and other distribution methods. It currently shows the payout for a 65-year old couple from a life annuity adjusted for CPI-U (inflation) with 100% survivor benefits to be about 3.85%. Wade's current estimate for the payout of a “4% Rule” spending regime is about 2.92% (the “4% Rule” is currently a little less than a “3% Rule”).
[Tweet this]Annual income implied by median retirement savings is only $4,085 from an annuity and $3,098 with 4% Rule.
It's interesting to look at the savings in the Motley Fool chart in terms of the income that those amounts imply for a life annuity and for “4% Rule” spending. As the following chart shows, the median annual income implied by the TMF chart is only $4,085 for households that buy an annuity and $3,098 for households that go with the “4% Rule”. That’s not a lot of income. Of course, some of these families have pensions, some could borrow against the equity in their homes, perhaps through a reverse mortgage, and most will have Social Security benefits.
Realistically, families that have saved less than the median savings would probably be better off using the savings for emergencies rather than annuitizing them.
As for retirement savings, while saved amounts seem small for most households, the amount of annual income that could possibly be generated is even more discouraging for more than half of 55-64-year-old retirees today.
To get a quick estimate of your possible annual spending, divide the amount you hope to have saved by your retirement date by 34 if you plan to spend systematically from an investment portfolio, or by 26 if you plan to purchase an annuity.
If your calculated spending is disappointing, Wade Pfau has recently written extensively about reverse mortgages (download PDF) and their potential to bail out under-savers. He adds that "there is great value for clients to open a reverse mortgage line of credit at the earliest possible age."