The Greatest Generation might have had it rough, but at least this guy had a great view.
Ask the average American how they obtain the money that supports them and the answer is simple: a job. But as you age, there are lots of other places that your income can come from: self-employment, passive income from investments or rental property, and Social Security -- to name a few.
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The Bureau of Labor Statistics debuted a new tool this year that allows users to view how the average American household makes its money, and it breaks this information down by generation. Here's how those divisions were defined.
Source: U.S. Bureau of Labor Statistics, Consumer Expenditure Survey.
As you might expect, the average American household's income follows an arc that peaks around age 50 and then declines as households enter retirement. On an absolute level, here's what it looks like. You can compare your own household's pre-tax income to your own generational peers to see where you stand.
There's nothing surprising here -- when you zoom out to 30,000 feet, almost every study will show gradual growth in earnings until one's mid-40s and early 50s, followed by a slight decline, and then a rather steep one once people enter retirement.
What's telling, however, is where this income comes from. I'll break down these streams into six categories:
- Wages and Salaries: What most of us consider normal income from our jobs.
- Self-Employment: Similar to wages and salaries, except you are working for yourself.
- Social Security & Pensions: Includes Social Security, as well as private and government pension systems.
- Passive Income: Is derived from interest, dividends, rental income, and other property income on an individual basis. This is where most people's nest egg comes in.
- Public Assistance: Traditionally, this is what's referred to as "welfare," where money is provided for supplemental security income and food.
- Disability and Other: Includes worker's compensation, unemployment, and veteran's benefits, and all other forms of income.
The last thing I want to do is sound like an alarmist. Making people panic about where their income will come from in retirement does little good. Instead, I think it's important to point out a few key stats from above, talk about how they'll change as today's working Americans age, and what steps can be taken to put yourself in the best position possible to achieve financial independence.
Social Security, pensions, and what the average American should do to prepare It's crystal clear that Social Security is an enormously important social program. For the Silent Generation, Social Security and pension plans supply a full 62% of pre-tax income. For the Greatest Generation, it jumps to 73%.
Full stop. Read that again.
While government pensions are still common, private pension plans are fading quickly and being replaced by defined contribution plans -- more commonly known as your 401(k). And even though it's highly unlikely that Social Security will stop being paid, if changes are made to how the program is funded, benefits could be cut by about 25%.
Today's workers need to be aware of these shifts. If you want to be able to replace the lost income from Social Security and pensions when you reach retirement, focus on the column that's pretty small from above: passive income.
Your ability to save money from every paycheck, put it away in low-cost funds, and do the hard internal work of figuring out what your own level of "Enough" consumption is will make all the difference in helping this column to more than supplant any losses from Social Security and pensions.
If you're just getting started with investing, I suggest checking out our 13 Steps to Investing Foolishly. The sooner you get started, the better off you'll be.
The article Heres How the Average American Household Earns Its Income, by Generation -- How Do You Compare? originally appeared on Fool.com.
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