The average retirement age in the United States has ticked up over the past decade. As you can see in the chart below, as of 2014, the average retirement age increased to 62 and the expected age of retirement is now at 66.
If you look at the state of retirement savings these days, the expected age of retirement for most people should probably be higher than age 66.
The chart above is beyond alarming. The median retirement savings for those age 50 to 55 is only $8,000? Sadly, it is. And those between 56 and 61 show a median retirement savings of only $17,000. A lot of people will be working well into their 80s with savings like that.
Having Enough Income In Retirement
If you are 55 years old and only have $17,000 saved, you won't be retiring any time soon. But if you have been saving and have a decent nest egg saved up, you might be able to retire earlier than you think. The key is to have enough income in retirement to cover your expenses.
With bond yields still very low, interest payments from bonds won't cut it for retirement income. Instead, I look to dividend payments from the very best dividend payers out there. I start my search with the Dividend Aristocrats.
Dividend Aristocrats are some of the best companies on the planet. To be included in this list, a company must have increased their dividends for over 25 years in a row.
Dividend Aristocrats have performed very well over the past ten years. They have outperformed the S&P 500 by over 2 percentage points per year during this timeframe.
A Case Study
Let's see what we can do for a couple that wants to retire before age 62. They currently think they can move all of their money to Treasuries when they retire at age 60. Let's see how that pans out for them by using our retirement planning software.
I ran their retirement projections in our retirement planning software. With bond yields so low, you can see in the chart below that their income does not cover their expenses.
I projected that they would run out of money by age 80. This couple should not be retiring yet.
What Can They Do?
Treasury bonds simply will not cut it for this couple. We must get at least some of their investments into dividend champions that will increase their dividend payments over time. I chose a basket of dividend champions for them that include Intel (INTC), Exxon (XOM), Coca-Cola (KO), and 3M (MMM). These companies have shown that they will never cut their dividends, even in terrible recessions like we saw in 2008 and 2009.
Now I want to take half of their Treasury money and move it into my dividend champion portfolio. My dividend portfolio has an average dividend yield of 3.4%. I assume dividend growth of 6% per year and stock price growth of just 3% per year to be conservative. Here is what I found:
They now easily cover their expenses with income. I found that this couple will never run out of money in retirement. The dividends being thrown off by our dividend champions makes all the difference in the world to this couple. Over time, the dividend growth helps boost the overall dividend yield until they can simply live off the dividends only and won't even have to worry about price appreciation.
Income planning in retirement is much more difficult than it used to be because of our low-interest-rate environment. We must find other ways to boost people's income in retirement if we want people to retire without running out of money. The only sure-fire way to do this in today's world is finding the best dividend payers who will not cut their dividends, even when times get tough.
Regardless of where you plan to retire, the number one factor in ensuring that you can retire on your terms is your 401(k). Make sure that your 401(k) is maximizing its potential with this free analysis that checks your fees, fund mix, and other factors to help you hit your retirement goals.