The Reality of Retirement in the United States of America

Ah, retirement. The subject of my naughtiest daydreams, supplemented with ample time for reading on the porch, visiting family and friends without a laptop in tow, and an out-of-character penchant for cooking that I don’t fully believe will materialize when the time comes.

Retirement planning is such a fixture of life and finance in the US that it’s easy to forget that it’s a somewhat uniquely American phenomenon: That is, the way we plan for retirement in the US (save as much as possible! worship compound interest charts! sacrifice one baby bull every Q4 to Jerome Powell to stay in his good graces!) is not the norm everywhere else. 

For example: “To ensure a comfortable retirement, Australian workers are in charge of contributing enough for their futures—and they do so through a nationwide mandatory defined contribution plan, which would provide income on top of a basic old age pension scheme. Australia also uses investment portfolios, but employers are responsible for contributing most of the assets, and employees are told their contributions are voluntary.” 

This is how MarketWatch describes the Australian system, which was—coincidentally—the first “other” country approach I was introduced to by a Money with Katie reader who was watching in disbelief from afar, as American millennials scrambled to make sure their contributions weren’t setting them up for a future of cat food and reverse mortgages. “Man,” they said, “I’m so happy the Australian system is so much simpler.” To be fair, the Australian system is definitely on the more generous end of the spectrum worldwide.

Whether or not it’s actually simpler is subjective, but this conversation was the first time I realized that my very American obsession with amassing enough wealth to retire was not shared by my brethren down under.

The truth? Supporting an aging population that can no longer work is a problem that every country faces (like post-one-child-policy China, which is rapidly approaching the point at which they don’t have enough young people to work to support the old people).

America’s version of Australia’s defined contribution plans and old age pension schemes? Social Security and the 401(k). If we continue down the path we’re on, the two trust funds that support Social Security will run out of money by 2037—and new retirees will only receive roughly 80% of the benefits they’re owed. This is—to put it lightly—an impending clusterfuck, as many Americans rely on Social Security for most (if not all) of their income in retirement, and the average payments don’t exactly leave room for a whole lot of discretionary fun (or, worse, heightened medical bills).

As of July 2022, the average person receives a Social Security check worth $1,544 each month. That’s…roughly enough to pay my half of our rent. (There’s this handy tool you can use that will estimate your benefits; for some reason, it always tells me it “can’t process the request,” though, so try at your own willingness to waste time.)

The reality is that—unless you are extremely frugal and own a paid-off home—Social Security will likely not be enough to retire on whether now or post-2037, even if we get the full 100% (not the predicted 80%) we’re owed. *Cue a meme about how the millennials get the shortest end of every stick imaginable.*

Whose retirement is it anyway?

It’s easy to accept retirement as a fact of life when your whole job is blogging about personal finance (hello!), but “retirement” as a concept is actually fairly new in human history—for most of human history, people just worked until they died. Fun!

“The idea that employees should have some kind of a defined benefit in retirement gained traction during the boom decades that followed World War II. Large corporate employers took a paternal approach to their workers and offered pensions as part of their talent recruitment and retention efforts,” says Workforce, a SaaS company with a shockingly robust blog. 

But guess what? It worked! People stayed at the same company their entire career because Corporate Daddy was writing the checks in the Golden Years. (My dad worked at Dow Chemical for his entire career and now gets a juicy pension payment. He was in the crossover generation that benefited from both pensions and 401(k) availability. Lucky bastard! Love you, dad.)

Speaking of the 401(k), Workforce also notes, “The ’70s brought America staggering inflation, disco, and legislation that changed retirement forever. In 1978, Congress passed The Revenue Act of 1978 in which Section 401(k) cleared the way for the establishment of defined contribution plans.” Damnit. 

While we all know that tax advantages get me adequately hot ‘n bothered, the reality was that this new legislation quietly shifted the burden from the employer to the employee to guarantee their own financial future. Pensions slowly fell out of favor, and now, if you tell me you have a pension plan, I’ll probably quietly curse your name in a mix of envy and awe. 

The TL;DR? It’s kinda no surprise that today’s American workers are under-saving, since funding your own retirement is a relatively new hurdle. 401(k)s and IRAs are not a naturally occurring phenomenon in nature—they were legislated into existence in the last 50 years, and the people we (millennials) took financial advice from growing up (our parents, most likely) used them as supplemental boat funds on top of their pensions, not as their main source of retirement income.

Second- and third-order effects of self-funded retirement

One popular conspiracy theory I see floated in the back alleys and seedy underbellies of Personal Finance Twitter is that the Fed can’t let the stock market fail, because the majority of US citizens’ retirement hinges on its success.

While this is…oddly comforting, I’m not sure it passes the sniff test of…well, what the Fed was doing in Q1 and Q2 of this year. 

It might be conspiratorial to suggest Yellen will swoop in to prop up the market if shit goes south, but there’s a seedling of truth to the sentiment: A lot of Americans will be up a creek when there’s a prolonged nosedive, because practically the entire millennial workforce (at least, those of the 72 million who aren’t teachers employed by the state or career military) is relying on nothing but their investments and scraps of Social Security to get by in retirement.

Realistically, this could create dire third-order effects—a boom in houselessness, hunger, and, in some cases, extreme poverty that could send our economy as a whole into a death spiral (if you can’t even afford a roof over your head, you likely won’t be able to support your local economy through consuming other goods and services).

I published a podcast episode a few months ago about why you may need to save less for retirement than you think, mostly because I know many in my audience are highly responsible, highly neurotic (hello again!) individuals who are more likely to subvert their current desires for the promise of a magical future. (And because I think balance is important to preach in the online personal finance world in which it’s easy to favor extremes.)

Make no mistake, though: The power of compounding is powerful, but only if you’re feeding the compounding engine enough fodder.

Calculating your own needs based on your age

Ah, the moment where the rubber meets the road! The point at which many are tempted to avert their eyes!

Fear not, dear Rich Girl—whether you’re just starting out and have all the time in the world or you’re rounding the corner to 50 and realizing your impending retirement may be underfunded, we can use some relatively simple math to understand how much we need to be saving.

Why does this matter? For starters, only 22% of people currently approaching retirement age believe they’ll have enough money to maintain a comfortable standard of living, down from 26% a year ago. 56% of people say they expect to have less than $500,000 by the time they retire (providing an annual income of $20,000 per year, according to the 4% rule). Supplement that with the average Social Security check, and that’s about $3,200/month to live on, at best.

That’s not terrible, to be sure; I lived on less when I was 22 and starting work—but in my Golden Years? After working for the majority of my adult life? I’m not trying to cosplay my “roommates and Top Ramen” phase of life again. 

The same study found that only 3% of retirees deemed they were “living the dream” (while around 35% said they were comfortable). I want all of Rich Girl Nation to live the dream, y’all. All of you. So let’s talk about how to get there.

Taking matters into our own hands, as it appears that’s the only option most of us have

Alright, so let’s get the obvious out of the way first: The earlier you start, the better. There’s really no getting around this. 

For every decade that you delay starting, you need to roughly double your monthly investment contributions. As Nick Maggiulli points out, over half of your final portfolio value is saved in the first decade (example for a 40-year investing timeline). 

The idea that “you’ll invest when you earn more” is largely a myth, as some surprising studies have revealed that those who earn more often end up with more credit card debt than when they earned less. The reality? When we earn more, we spend more—especially if we haven’t already reflexively built the saving and investing muscle into our monthly cash flow. 

Encouraging people to start early was one of the major reasons I started Money with Katie, because after being exposed to chart after chart in the financial independence world, I realized that learning (and implementing) this information in your twenties would change the trajectory of someone’s life. 

So if you’re like, “But Katie, I don’t make enough money to invest,” remember: No amount of money is too little to start building the habit, even if it’s $5 a month. 

What number should we shoot for? Well, the problem I see with traditional retirement advice is that it suggests aiming for 75-80% of your pre-retirement income (under the assumption that you’ll pay less in taxes as a retiree, stop saving, and benefit from other cost cuts)—which is all fine and dandy, except for the fact that almost nobody makes the same amount of money throughout their entire career. My income has ranged anywhere from $12/hour to $400,000/year.

Instead, it’s more useful to use your spending as your guidepost.

If you earn $50,000 per year but live on $30,000, that’s worthwhile information—if you earn $500,000 per year but live on $50,000, that’s equally helpful to know.

The challenging part about spending is that it, too, fluctuates through different life stages, and it’ll be impacted by factors like where you live, how many kids you have, and if you have any medical or financial needs outside of the ordinary (she types as she fights an erroneous $80 bill from a doctor’s office for a routine checkup). 

A range can be helpful. For example, I know when I was single I lived on about $3,000 per month. When I got married, my half of our monthly spending jumped up to about $4,000 per month. When we have kids, it might go up to $5,000 or $6,000 (for just my “half,” for consistency’s sake). This means our “dual income” each month needs to range anywhere from $6,000 to $12,000 per month. 

I can use those numbers to tell me quite a bit. If I multiply by 12, I get our annual spending: Somewhere between $72,000 and $144,000 per year. 

If I multiply those numbers by 28, I get the “portfolio target” that’ll allow for a safe withdrawal rate of roughly 3.5% (slightly more conservative than the 4% rule as an extra buffer). That’s anywhere between $2mm and $4mm, which is—to be fair—quite a wide range.

But when we’re talking about the ~world of compounding~ 30 years from now, it’s actually not all that wide (and we’re obviously using super generous monthly spending allowances based on a world in which we have multiple children). 

Now that I know we need between $2mm and $4mm to retire (depending on our chosen lifestyle at retirement), we can work backwards to figure out what it’s going to take to get there. 

This is where I like to use a tool like the Financial Independence Planner to make the math a little bit easier. The good news? A lot of this is proportional. A household earning $50,000 per year is likely not spending $12,000 per month, unless they’re financing their lifestyle with a thick stack of Mastercards.

For example…

A household spending $5,000 per month with $120,000 in earnings (two earners making $60,000, for example) will reach financial independence and be retirement-eligible in 26 years, assuming they’ve got $50,000 invested already (a number I chose arbitrarily). The tool considers all of these inputs and then tells you when you’d be at that blessed work-optional point. 

The best way to actually enact something like this? Try to invest every single month. Whether it’s a set amount of money based on a percentage of your income or a percentage of a variable income that’ll go up or down depending on how much you earn, making it a monthly, recurring habit is the best way to limit your risk and benefit from the ups and downs of the market as they occur.

In summary…

The TL;DR: It’s very easy to calculate how much you’ll likely need to ~live the dream~, and with a little help from Excel, it’s even easier to figure out how long it’ll take to reach it based on how you’re earning, spending, and saving currently. 

As long as we live in the Late Stage Capitalist US of A, we have to take our futures into our own hands—as much as I wish someone would do it all for us. Though, I suppose if that were true, Money with Katie wouldn’t exist (a true chicken or egg conundrum!).

Taking accountability for your own #dream can be fun, though—you don’t have to live on a state-sponsored defined benefit plan. You can create the retirement you actually want for yourself by investing early and often.