Income can peak before you are ready

Most retirement calculators are optimistic to a fault. They assume our incomes will rise throughout our working lives, or at least stay roughly the same.

In reality, our incomes are likely to have peak years — and sometimes decades — before we retire.

Consider this:

• People's biggest wage increases tend to happen in their 20s and 30s, with more modest increases in midlife followed by declines, according to a 2016 analysis of Social Security earnings records underwritten by the Federal Reserve Bank of New York.

• Most people's incomes peak by age 45, the researchers found, although the top 20% of earners peaked in their 50s.

• More than half of those who enter their 50s with a stable job are laid off or otherwise forced out the door, and the vast majority don't recover financially, according to analysis by ProPublica and the Urban Institute.

These may be grim statistics, but if you are tempted to put off saving for retirement, take heed.

What is true on average for a group of people may not be true for an individual, of course.

Understanding these general patterns, though, could help people make better decisions about spending, saving and when to retire.

Generally, the more education people have, the more money they make over their lifetime and the later their earnings peak, Burtless said.

"For somebody with a position like professor at a university, it might be when they're in the second half of their 50s, as opposed to the second half of their 30s, which it might be for your brother-in-law who failed to complete high school," he said.

But the 50s tends to be a dangerous decade for workers, according to ProPublica, an independent nonprofit newsroom, and the Urban Institute, a nonprofit think tank that researches social and economic issues.

This job loss had a substantial economic effect, either by reducing their earnings at least 50% or resulting in six months or more of unemployment, according to the research.

The median household income of these workers dropped 42%, and only one in 10 ever earned as much after they left their jobs as before.

An additional 9% left their jobs involuntarily for personal reasons such as health.

The analysis was based on data from the University of Michigan Health and Retirement Study, which tracks 20,000 people in the U.S.

Job disruptions and declining earnings help explain why so many people in their 60s have so little saved, Burtless said.

People entering their 50s without having saved enough for retirement may need to switch up their planning.

They should prepare to work longer, or cut their expenses, rather than assume rising incomes will help them make up the deficit, said certified financial planner Michael Kitces, who blogs at Nerd's Eye View.

Kitces advises people in their 20s and 30s to commit to putting half of their raises into retirement funds.

Since those raises are likely to be largest in the early years, saving half can jump-start retirement funds while limiting "lifestyle inflation," or the tendency to spend more as income increases.

It can be tempting to take on a big mortgage, for instance, thinking that future salary boosts will make the payments more manageable, or to celebrate a raise by buying a fancier car.

"Recognize that it's a lot harder to remove something from our lives than it is to just not add it to our lives in the first place," Kitces said.