Wednesday, August 15, 2012

Your Income in Retirement

Your income will decline after you retire. It's not a question of whether but how much, according to studies of the economic status of older Americans before and after retirement. Research published in Social Security Bulletin quantifies the how much.

Using data from the nationally representative Health and Retirement Income Study, which tracks cohorts of older Americans for decades, SSA analyst Patrick J. Purcell compared pre- and post-retirement income for 10 years among retirees born between 1931 and 1941. The results show a median replacement ratio in the first two years of retirement of 73 percent. In other words, the income of these retirees was 27 percent below their pre-retirement income. That doesn't sound too bad. But there's a catch: Purcell's study shows the replacement ratio sinking as retirement lengthens. In the third or fourth year of retirement, the median replacement ratio falls to 63.5 percent. It continues to fall, and by the 9th or 10th year of retirement the median ratio is just 54 percent--or 46 percent below pre-retirement income.

Can you live comfortably on about half of what you make today? You may be about to find out.

Source: Social Security Administration, "Income Replacement Ratios in the Health and Retirement Study," Patrick J. Purcell, Social Security Bulletin, Vol. 72, No. 3, 2012

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