Shattering Another Retirement Myth

Most retirement plans assume a simple income progression. For example, the plans often take today’s salary and assume it rises at the rate of inflation, at least, until retirement age. A more rigorous plan might assume some promotions or pay raises above the inflation rate along the way. It turns out that, outside of government, that’s not a good planning approach. For most people, salary and wage income actually peaks in their 40s or early 50s. After that, it stagnates or even declines.

In the latest economic crisis, the situation’s been even worse. Those nearing retirement age have been damaged disproportionately more than others, according to the latest data. On average, they’re earning about 10% less in real dollars than before the crisis.

It’s clear that assuming steady increases in pre-retirement income is a dangerous assumption. Lower pre-retirement income now means you can afford to save less for retirement and will earn less investment income. To adequately prepare for retirement, you need to be conservative and also build contingencies and cushions in the plan. You need to look at different scenarios rather one plan based on fixed assumptions.

Income drops vary significantly by age, though. Households led by people between the ages of 55 and 64 have taken the biggest hit; their household incomes have fallen to $55,748 from $61,716 over the last three years, a decline of 9.7 percent.

Sustained unemployment among older workers may be at least partly to blame for this decline. Unemployment rates for that age group are relatively low, but once older workers lose their jobs, they have an unusually hard time finding re-employment. And even when they do find new work, they usually take a pay cut.