The 13 States Heading for a Retirement Savings Crisis
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How bad is the retirement savings crisis by state and what can you do to avoid the fallout?
We know that Americans are horribly prepared when it comes to saving for retirement. There’s no shortage of news on rising healthcare costs and poor investor returns.
But just how bad could the retirement crisis be?
Shockingly bad as a matter of fact.
It turns out that people in 13 states, on average, may fall short of their spending needs by 40% or more. In fact, people in the Rainbow State may be facing cloudy days with retirement income less than half their current household income.
Is your state facing a retire-pocalypse?
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The map shows an estimate for retirement income in each state and what percentage that income would be of the median household income.
To estimate retirement income, I used the average retirement savings in each state from the Personal Capital database. Using the 4% retirement rule as annual investment income, I deducted state capital gains taxes. From the average social security benefit of $2,720 for a two-retiree household, I deducted state and federal income taxes.
Expected retirement income ranged from a low of $36,539 in Hawaii to $42,232 for the average investor in Alaska. Since federal income taxes are the same, the difference comes from state capital gains and income taxes.
Of course, income is only half the story. The cost-of-living in your state is just as important.
This is where retirees in states like Hawaii and Massachusetts run into trouble with a cost of living well over the national average. In fact, we really don’t see that much difference in average retirement savings in different states. The difference is in how much it costs for them to live in that state.
The five states with the highest median household income are also the five with the biggest shortfall in expected retirement income; Hawaii, Massachusetts, Michigan, New Jersey and Alaska.
Why the Retirement Crisis is Even Worse than it Appears
The lack of information about retirement savings means the problem is probably even worse than it appears. There is plenty of data on average 401k savings but very little on total retirement savings.
I had to use the database of Personal Capital users, a personal finance site that helps manage accounts and investments. That means the average retirement savings shown probably isn’t a good representation of everyone. After all, if you are using a personal finance app then you are more likely to be financially proactive and planning ahead for your retirement.
Besides not showing how really low retirement savings are for many people, using an average means that just a few people with millions in savings can boost the number higher. Numbers nerds like myself like to use the ‘median’ instead, the number where half of the people are higher and half are lower, but the info just isn’t available.
Finally, as if all that were not enough, someone falling short on their expenses in retirement isn’t going to cut spending but will more likely spend more than 4% of their savings. Withdrawing 4% of your retirement savings is the rule-of-thumb for making it last but that won’t be an option for most people. They’ll be forced to take out much more a year and will end up running out of savings much faster.
That means relying exclusively on social security, something that one in five retirees do already, for an income of about $30,000 a year for two people.
How Bad is the Retirement Crisis in Your State?
The table below shows the average retirement savings, including 401k and other investments, for households in each state. I included total credit balance excluding mortgages from Lending Club data and the median household income from Census data for comparison, to show just how low retirement savings are compared to income and debt.
The final column is an estimate of retirement income you could expect given the retirement savings plus social security in each state.
There might not be much that can be done in some states to avoid this retirement savings crisis. The unemployment rate for people 55 and over is low at around 3.4% nationwide but as high as 5.4% in Alaska and 4.7% in New Jersey, two states in the top five for low expected retirement income.
Higher unemployment for older workers could make it difficult finding a job if retirement savings aren’t enough to pay the bills. A recession is almost a given within the next decade which will mean higher unemployment, especially for older workers.
How to Avoid Your Own Retirement Savings Problem
I hate being a downer. It’s no fun giving good people bad news but we have to face the situation.
The upside is that you can avoid a retirement savings crisis even if your state is heading for retirement apocalypse.
1) First is finding your own retirement number, how much you’ll need and how much you have saved. Social security can pay for some expenses but the rest needs to be made up with savings. If you divide the amount you need from savings each year by 0.04 then you’ll have an approximate for how much you need by the time you retire.
Example: If my expenses in retirement for my wife and I are around $45,000 and social security might pick up $30,000 after taxes, I need $15,000 a year from investments. Earning $15,000 a year means saving $375,000 (found by dividing $15,000 by 0.04).
*Understand that’s in a state with no capital gains tax so you’ll need more if your state charges investors on earnings.
2) You’ve got a few options when it comes to reaching your retirement number but it really comes down to either saving more, making more money or both.
The average household spends about $52,000 according to the BLS household spending survey. Cutting your budget by just $150 a month, that’s cutting just 3.4% from your budget, can save an extra $145,256 over 27 years.
The boom in the gig economy means it’s just as easy to make a little extra cash as it is to save it. I average just over $6,000 a month on different income sources and my five blogs. Becoming a freelancer can mean easily making $15 an hour and filling your savings gap with just a few hours a week.
3) If you’re close to retirement or just can’t seem to close the retirement savings gap then consider downsizing your expenses. Many retirees see their expenses decrease a little anyway because they don’t need to pay for work clothes, transportation or save for retirement.
That’s a start but you might have to cut further if your savings are coming up short.
- Consider moving to a smaller home or apartment
- Consider selling your home to your children on the term that you get to live rent-free but they get the house in your estate
- Cutting back to one car instead of two can save more than $4,000 a year for the average family
- Look for free community or senior events rather than more expensive outings
4) A more drastic move (literally) may be to move to a retirement-friendly state with no capital gains or income taxes. Eleven states charge either no capital gains tax on investments, no income tax or both.
States with no capital gains and no income tax include Florida, Nevada, Texas, South Dakota, Wyoming, Washington and Alaska.
If you’re still stretched for expenses in retirement, you could consider moving to another country with an even lower cost-of-living. You’ll still receive your social security and healthcare in many countries in Latin America is a fraction of the cost in the States.
My family lives on about $1,900 a month here in Medellin, Colombia. That includes all the amenities you would expect of a large city, health insurance for two adults and a child, and annual vacations back to the United States.
What NOT to Do to Avoid a Retirement Crisis
Whatever you do, don’t freak out and chase risky investments. Investing all your money in stocks rather than a mix of bonds, stocks and real estate or chasing risky investments is the worst thing you can do to close the retirement gap.
The bull market in stocks is the second-longest in history. That isn’t going to last forever and investors have a horrible track record of timing when to sell investments. That means putting all your money in stocks is only going to mean losing money when the crash finally comes.
Instead, focus on saving or making more money. Invest in a diversified portfolio of stocks, bonds and real estate that won’t crumble when the market does.
The retirement savings crisis is coming and there isn’t much states can do about it collectively. The fact is that people just aren’t ready for retirement with average retirement savings in each state that is well below what’s needed to pay living expenses. They’ll need to work longer and spend less. You can avoid the worst of this by saving more and planning now. Take the steps now to avoid a retirement savings gap and enjoy the retirement you deserve.
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