Study: Retirement income lags in most states

Roll of dollar bills in a bird's nest.

Will I have the income I need for a comfortable retirement? That question looms large for most of us as we approach the magic age of 65.

But a study by has found that seniors are falling far short of what they need in almost every state in the nation.

The rule of thumb among financial experts is that you need about 70% to 80% of your pre-retirement income once you quit working if you wish to enjoy a comfortable lifestyle.

Yet there are only two states, Hawaii and Nevada, where households of those 65 and over are making at least 70% of the income earned by households between 45 and 64 years of age, according to an analysis of Census Bureau data.

In the vast majority of states, these households earn just 50% to 60% of the income of those in the age group immediately below them. (Click here to find all of the state-by-state results.)

Nationally, these older Americans have incomes that average just 57% of those aged 45 to 64, far below the replacement level suggested by financial planners and other experts.

In four states, they make less than half. The 65-and-above crowd fares worst in relation to the younger group in New Jersey and Massachusetts.

The percentage of Americans that continue to work beyond age 65 has been growing in recent years, but most people in the 65-plus age group are retired.

Financial planners and other analysts caution that the retirement income a household needs can vary, depending on many factors, including debt and retirement plans. Some retirees need more than 70% to 80%. Others can get by on less.

But the fact that older Americans are failing to reach this rough benchmark in 48 states, and are actually below the 60% replacement income level in 31 states, paints a stark picture of how older Americans are faring.

“People who live in a given area are competing with each other for the same goods and services, including housing, cars and groceries,” says Mike Sante, managing editor of

“This is why we thought it would be useful to compare younger and older adults’ incomes in each state. We found that many senior citizens are significantly underfunded and risk running out of money, especially since people are living longer than they used to and may need to support a two- or three-decade retirement.”

Retirement Income by State

Here is the median income for households 65 and over, and how that compares to the median income of households headed by workers 45 to 64. Retired households earn an average of $35,107 a year, or just 57.41% of what the average pre-retirement household earns. analyzed household income data from the 2011 American Community Survey, which is conducted each year by the Census Bureau.

It asks millions of Americans how much they make and where that money comes from, including any government assistance, such as disability or welfare payments, and all retirement income from pensions, IRAs or 401(k) plans.

We then compared the income for households in the 45-to-64 age group — the prime earning years for most Americans — with those 65 and up.

The fact that Social Security is the primary source of income for most retired Americans — not pensions or retirement savings — goes a long way toward explaining why so many seniors have so little money.

The average Social Security payment for a retired worker at the start of 2012 was only $1,230 a month, or $14,760 a year, far below the amount necessary for most Americans 65 and older to maintain an income equal to 70% of those in their prime working years.

“It’s not just low-income seniors. It’s also middle-income seniors that rely on Social Security for a considerable portion of their income,” according to Gary Koenig, an economics analyst for AARP’s Public Policy Institute.

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That's why AARP is alarmed about proposals to cut Social Security benefits by using a more conservative measure of inflation, called the chained CPI, to calculate future cost-of-living adjustments.

“Seniors, for the most part, have very modest incomes and are very reliant on Social Security," Koenig says. "We also know that as they age, there are more demands on their incomes, which is why the chained CPI, from our perspective, just doesn’t make a whole lot of sense.”

Michael Finke, a professor of personal finance at Texas Tech University in Lubbock, says the decline in defined benefit pensions has left older Americans less financially secure.

Employers used to take responsibility for their workers' retirement by guaranteeing a monthly check for as long as they lived.

The amount employees received was based on their salary and years of service. They didn't have to do anything special to earn it. Pensions were just another benefit, like health insurance and paid vacations.

A 2010 study by the National Institute on Retirement Security (NIRS) found that the poverty rate among older households with no income from a traditional pension was approximately nine times greater than the rate among households with a defined benefit pension.

Unfortunately, traditional pensions have been disappearing for decades.

States with the most retirees

State Percent of households 65+
Florida 27.90%
Pennsylvania 25.00%
Hawaii 25.00%
West Virginia 26.20%
Maine 24.30%
Delaware 24.30%

As recently as 1998, 52% of Americans over age 60 received income from a defined benefit pension, according to the NIRS. By 2010, that figure had fallen to 43%.

The decline has been even more dramatic among private-sector retirees, dropping from 38% in 1979 to 15% in 2010.

Over the past 30 years, employers have been moving workers into defined contribution retirement plans such as 401(k)s that require them to set aside money from their paychecks to fund their retirement.

Employees have not fully understood — or acted — on that new demand.

“There’s a pretty good chunk of Americans that we know haven’t saved much for retirement,” Finke says.

As the baby boomers begin to retire, Fidelity Investments says the average balance in their 401(k) plans was only $120,400 at the end of 2012.

If managed properly, to ensure the money lasts for about 30 years of retirement, that much savings can provide an initial monthly income of about $400, or about one-third as much as the average Social Security check.

Because of the switch from pensions to defined contribution plans, “we’re seeing much broader differences in retirement preparedness," Finke says. "When you give people greater responsibility, it’s going to mean a greater variation in income.”

It's easy to assume Hawaii has the highest current level of replacement income because lots of well-to-do mainlanders retire there for the gorgeous scenery and wonderful year-round weather.

But the prevalence of traditional pensions appears to be a major reason Hawaii leads our study in replacement income.

Pensions are a common benefit of unionized jobs, and Monica Jennings, a certified financial planner in Honolulu, says, "We are one of the most highly unionized states, so there’s a lot of pension income here."

retirement highway sign

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Nevada also has a higher percentage of union workers than most states, although the difference is not as extreme. And like Hawaii, Nevada's climate draws retirees from around the nation.

Justin Thomas, a certified financial planner in Reno, Nevada, believes the state’s tax climate also is attractive to retirees. Like Hawaii and several other states, Nevada does not tax pension or Social Security income.

But Nevada also has no state income tax.

“What’s probably helping our demographic here is having wealthy Californians say, ‘We’re going to be drawing so much more income if we just move one state away,’ ” Thomas says.

Other highlights from the state-by-state analysis:

Older Sun Belt residents seem to fare best in comparison to those in the age bracket below them, with replacement income in the 60% range for most states.

But in many Sun Belt states, retirement incomes look good in part because overall incomes are lower. Retirees aren't making more, on average, than in most other states. Everyone else is just making less.

In Mississippi, for example, those 65 and over have the lowest average income nationally at $27,203. Still, that’s equal to 61% of the income of the age group below, which is also the lowest in the country.

The reverse is true in much of the Northeast. Those over 65 do less well in comparison to those in the age group below, but that’s at least in part because overall incomes are higher.

Massachusetts is the state where retirees are most likely to be stricken with envy at the lifestyle of their working neighbors, with a replacement income equal to only 45.21% of those in the age group below.

Still, the average income for older Bay Staters is $35,483, slightly above the national average. It’s just that residents ages 45-64 have a median income of $78,483, roughly $17,000 above the national average.

There's a large disparity between the incomes of older residents in different states. To take the most extreme example: Older Mississippians receive only a little more than half the income of Hawaiians 65 and up, which at $51,361 is the highest in the nation.

However, the cost of living also varies significantly from state to state, which can render dollar-to-dollar income comparisons questionable. Older residents of Hawaii and Alaska, for example, enjoy the highest median incomes in the U.S. but also deal with some of the highest living costs.

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