As a group eligible for Social Security, it is crucial to analyze the income sources for households ages 62-75. By comparing data from the Federal Reserve’s 2019 Survey of Consumer Finances (SCF) with the same report from 1995, we can identify three significant patterns.
Shift in Importance of Earnings
One notable finding is that earnings have become increasingly important for this age group. While low-income households maintain a stable percentage of earnings as a part of their total income, there has been a 10 percentage point increase for those in the middle group and a 13 percentage point increase for high-income households. Impressively, earnings now contribute to over half of the high-income group’s total income (refer to Table 1).
Composition of Retirement Income
Table 1 also provides an interesting insight into the composition of income from employer-sponsored retirement plans. The prevailing notion that we live in a “401(k) world” holds true for today’s private sector workers but not for retirees just yet. With the exception of low-income households, retirees continue to receive more significant benefits from defined benefit pensions rather than from 401(k) withdrawals.
Growing Income Inequality
Additionally, the distribution of income has become more unequal among households aged 62-75. This trend is evident when comparing the data from the SCF reports in 1995 and 2019.
These findings shed light on the evolving landscape of income sources for retired households. While earnings have gained prominence, defined-benefit plans continue to play a vital role in providing financial security during retirement, particularly for high-income households.
The Evolution of Retirement Income
The way individuals approach retirement has evolved significantly over the years. One contributing factor to this shift is the introduction of 401(k) plans in the 1980s. However, it’s important to note that only recent retirees have had the opportunity to benefit from this type of retirement plan throughout their entire careers. Additionally, participants are not obligated to start withdrawing their accumulated balances until their early 70s.
Despite the rise of 401(k) plans, it’s worth highlighting that for state and local government employees, defined-benefit plans still remain the primary source of retirement income. These plans continue to serve as a crucial financial support system for approximately 13% of the workforce.
A significant observation derived from the available data is an increase in income inequality among older households (refer to Table 2). In 2019, high-income households recorded an average income that was 2.8 times higher than the level seen in 1995. In comparison, low- and middle-income households experienced ratios of 2.3 and 2.4, respectively. Earnings play a significant role in these discrepancies. It appears that higher-educated individuals with more resources have grasped the notion that working longer is a key strategy for securing a financially stable retirement.
Another pertinent aspect to consider is the challenge of defining “retirement” in light of the rising earnings for high-income households. Previously, the receipt of Social Security (SS) benefits often served as a clear indicator of retirement status. However, even when both spouses in high-income households claim Social Security, more than a third of their income continues to stem from earnings (refer to Table 3). Finding a criterion that no longer places emphasis on earnings becomes essential. The only circumstance where this seems to be feasible is when both the head of the household and their spouse self-report as retired.
In conclusion, the retirement landscape has experienced significant transformations. The introduction of 401(k) plans, the reliance on defined-benefit plans by government employees, the widening income inequality among older households, and the challenges of clearly defining retirement for high-income households all contribute to these shifts. Understanding these changing dynamics is crucial for adapting retirement planning strategies to ensure financial security in the future.
Excitement for the 2022 Survey of Consumer Finances Results
I am filled with anticipation to witness the unveiling of the results from the highly anticipated 2022 Survey of Consumer Finances. The release of this sought-after data is expected to occur within this month, adding to the air of anticipation.
