Not surprisingly, Americans have unrealistic expectations about how they will fund their retirement years, according to new research.
But just how unrealistic is shocking—future retirees are under the impression that withdrawals from their 401ks and other retirement accounts will be four times as large a source of income as they are likely to be.
Hearts & Wallets’ Retirement & Funding: Building Informed Expectations About Sources of Income in Retirement details anticipated income generation and actual income replacement rates from a variety of sources.
The report finds those who have yet to retire believe withdrawals from 401ks, IRAs, 403bs and 457 plans will account for 16 percent of their income.
In reality, this type of revenue makes up only 4 percent of current retirees’ cash flow.
What’s more, “twice as many future retirees think they will have retirement account income as currently have such income among all retirees nationally,” Hearts & Wallets points out in its report.
Fortunately, the picture looks better when focused exclusively on those who hold these accounts. Within this cohort, “retirement account withdrawals represent about 22 percent of income, 24 percent for retirees with $500,000 to $2 million in investable assets and 30 percent for retirees with over $2 million.”
But unfortunately, when it comes to other sources of income, belief versus reality is misaligned, as well.
Identical to expectations for retirement accounts, future retirees think dividends will provide 16 percent of their income when they exit the workforce. Among the wealthiest workers who have yet to retire, this figure is 27 percent.
Based on Hearts & Wallets’ database of 40,000 U.S. households, however, dividends from stocks and mutual funds make up just 4 percent of current retirees’ income.
When considering only those retirees who have succeeded in generating income from dividends, the outlook improves—and even exceeds expectations. “Dividends represent almost one-fifth of their income (19 percent) across all asset levels, and over one-third (34 percent) of income for retirees with $2 million and more in investable assets.”
Similar trends were uncovered with regard to income generated from taxable brokerage accounts. Withdrawals from this source amounted to 2 percent of all retirees’ income.
But, if focused only on retirees who are making withdrawals on taxable brokerage accounts, this source of revenue provides 21 percent of income overall, 23 percent for retirees with $500,000 to $2 million in investable assets and 29 percent for those with over $2 million.
The report goes on to note that real estate “appears insignificant (1 percent) at the national level for all current retirees [as a source of retirement funding], and it is only 3 percent for all future retirees. But for current retirees who derive some income from real estate this resource can be important, representing 22 percent of income for retirees of all asset levels, 20 percent for retirees with less than $100,000 in investable assets, and 24 percent for retirees with $500,000 to $2 million.”
So, what are Americans doing to make up for an unanticipated shortage of money in retirement? Research shows many are continuing to work.
This pay makes up for around 8 percent of the overall income for current retirees and their spouses, regardless of asset level. Among only retirees who are employed, this figure jumps to 36 percent of total income.
Future retirees actually anticipate that employment will make up an even larger amount of their income during retirement. Overall, those who have yet to retire think this paycheck will account for 10 percent of their cash flow. For households with under $100,000 in investable assets, the figure is 13 percent.
Among retirees who are definitely planning to continue working into their retirement years, “this income source represents 25 percent of income for all asset levels, 30 percent for households with under $100,000, 16 percent for households with assets of $500,000 to $2 million and 25 percent for households with $2 million plus.”
Further analysis finds those with pensions are far more likely to anticipate hanging up their hats for good at a specified time than those who expect to rely on income generated from retirement accounts and investments. Half of pensioners say they want to retire or stop working at a certain age, compared to 32 percent of workers without a pension.
“Consumers want to optimize their last chapter,” concludes Laura Varas, CEO and founder of Hearts & Wallets. “This report provides a roadmap to help develop personalized advice and guidance that incorporates income sources, family dynamics, work status and other factors to help consumers grapple with the ultimate uncertainty, life expectancy, to gain the most joy out of their life by using their assets to achieve their goals.”
Jessa Claeys is a writer, editor and graphic designer.
