What do retirees in Hawaii, Alaska, and South Carolina have in common? Turns out seniors in those three states share something significant: retirement incomes that equal at least 70% of the income they earned in their working years, according to a study released today by Bankrate.com.
Incomes for retirees in the other 47 states and the District of Columbia fall short of that threshold, the amount generally considered necessary to maintain prior living standards once you quit working. The state with the lowest income replacement rate? Massachusetts, with retirees replacing only 48% of the income they had while working. “That kind of drop-off is alarming,” said Greg McBride, Bankrate’s chief financial analyst.
To calculate these numbers, Bankrate used data from the U.S. Census Bureau’s 2014 American Community Survey. Researchers divided the median annual household income for those 65 and older by the median household income for those between 45 and 64 years old. (The Census Bureau defines gross income to include Social Security, income from 401ks and IRAs, wages, salaries, tips, government assistance, interest, dividends, pensions, rental income, royalties, and other sources.)
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So why did residents of Hawaii, Alaska, and South Carolina wind up on top? While there might be many factors at play, Hawaii and South Carolina both have relatively large numbers of military personnel, and military retirees tend to have generous pensions, McBride explained. Residents of Alaska, meanwhile, receive dividends from a state fund that’s invested in oil and other revenues.
Of course, while 70% is a general rule, each retiree’s situation is different. A couple who wrote their last college tuition check and made their last mortgage payment right before retiring might live just fine on less than 70% of their pre-retirement income, said Thomas Mingone, founder and managing partner of Capital Management Group in New York, who does income replacement calculations for his clients. Ditto those who downsize and move to a less expensive area.
On the other hand, pre-retirees who spend a large portion of their income on leisure activities might find it hard to live on 70% of what they made while working. After all, in retirement they’ll have even more leisure time to fill. And those who spend most of their pre-retirement income on basic necessities will also have a difficult time making do with much less, said Mingone.
Whatever retirement income you start out with must rise over time to keep pace with inflation. Social Security gives a modest cost-of-living adjustment most years, but for the most part retirees are going to have to give themselves a raise, Mingone said, by withdrawing a larger amount of their savings: “You might need twice the income at the end of retirement than at the beginning.”
For help figuring out your income needs in retirement, check out these ways to be smarter about drawing income from your nest egg.