High-Income Earners Fare Worse After 65

High-income households experience a larger drop in income after age 65 than lower-income households, which necessitates spending adjustments to be made.

High-income households experience a larger drop in income after age 65 than lower-income households, according to data from the Employee Benefit Research Institute (EBRI).

In this latest research report, EBRI compared household income five and 10 years prior to age 65 with that of household income five and 10 years after age 65. Typically, income is compared pre- and post-retirement, but EBRI chose age 65 instead of retirement because in many households at least one member continues to work, even part-time, after the age of 65 without fully retiring until later.

“Limiting the analysis of retirement income to retired households would result in ignoring such households, who, ironically, might be delaying retirement because of insufficient income,” wrote Sudipto Banerjee, PhD, with EBRI.

EBRI used data from the University of Michigan’s Health and Retirement Study, a biennial survey that started back in 1992. The study tracked income over a period of 10 years. Those who were ages 55 to 59 in 2000 had an average income of $111,177, which dropped to $78,437 in 2010 — a drop of more than 29% in average household income.

However, looking at the different income quartiles, EBRI found that households in the bottom-income quartile in 2000 were the only income group that experienced an increase in average household income by 2010. Average household income increased from $25,378 in 2000 to $36,613.

While it’s not clear why the average income increased, one reason EBRI suggests is that while only 24% of those households were dual-earning in 2000, in 2010 both members claimed Social Security benefits in 54% of these households. It’s important to note that while the households in the bottom quartile were the only to see an increase in income, they still remained in the bottom quartile.

“For low earners, Social Security replaces a higher proportion of their labor earnings, and adding spousal benefits to that might exceed the labor earnings of single-earning households,” Banerjee wrote.

The two upper-income quartiles experienced larger drops in their income. Average household income for the top-income quartile dropped 44% from $221,251 in 2000 to $123,184 in 2010. The problem high-income earners ran into was that income from work was the top source of income both in 2000 and 2010, but income dropped 63% and Social Security, capital, pension/annuity and other income didn’t come close to matching labor earnings. In comparison, for the bottom quartile, household labor income was almost entirely offset in retirement by Social Security income.

“…the income composition of top earners goes through a fundamental change after they reach 65: They not only experience a higher loss in income, but also experience a significant shift in their income composition,” wrote Banerjee.