Retirement Expectations and Retirement Reality

by | Jun 8, 2007 | Cash Flow, Weekly Column

retirementsaving.jpgWhen it comes to retirement, often what many people expect doesn’t turn out to be reality. Take the case of what you think you’ll be spending when you retire.

A recent survey on retirement spending done by Fidelity Research Institute shows that many retiring Americans don’t have a very good grasp on how much money it will take to enjoy their golden years.

The participants, surveyed both prior to and after retirement, were asked to estimate how much they expected to spend in retirement. Before retiring, 48% expected their expenses to decline from pre-retirement levels. Another third expected expenses to remain about the same. Only 18% expected any increase whatsoever in expenses.

That was the expectation. The reality was a bit different.

After retirement, expenses actually increased for 39% of retirees, double the number who expected an increase. While 48% expected expenses to decrease, only 33% found that they did. Only those expecting expenses to stay the same were close to being right; 28% found that to be the case.

To maintain your current lifestyle, you will need to have saved about 25 times your annual spending as of your date of retirement. Unfortunately, only 44% of all baby boomers are saving ANYTHING. About 56% spend every nickel they make, or more than they make. That’s scary, but that’s not all. Of those 44% actually saving for retirement, as of 2005, the average retirement nest egg was $50,000 and the median savings was $2,000. No, that’s not a typo. (These statistics are taken from an article, “Comparing the Retirement Savings of the Baby Boomers and Other Cohorts,” by Sharon A. DeVaney and Sophia T. Chiremba, published at the U.S. Bureau of Labor Statistics website at www.bls.gov.)

Let’s assume the average baby boomer couple spends $50,000 a year to support their lifestyle. Assuming they will get Social Security of $10,000, they need to find an additional $40,000 a year. That means they need $1,000,000 in retirement saving to have a 90% or better probability of funding their retirement without running out of cash.

When you consider that the average baby boomer born between 1946 and 1955 has $147,000 (using data frombaby-boomer.jpg the Federal Reserve Board’s Survey of Consumer Finances, as reported by AARP in 2004), the picture gets pretty bleak.

Hopefully, you aren’t average. Hopefully you’ve saved 10% to 20% out of every paycheck you’ve ever received, fully funded your employers’ retirement plans, and made sound investment choices. And hopefully, your retirement expectations are a reflection of reality.

What if you are only average, but you want to do better? Where can you get some help? My recommendation is to find a Certified Financial Planner (CFP®) who will guarantee, in writing, that you are a client, not a customer. This means they have a legal obligation to put your interests first and there is a good probability their source of income is only from client fees and that they do not sell anything. Two online sources of fee-only planners are http://www.myfinancialadvice.com and http://www.garrettplanningnetwork.com. Or check your local yellow pages for financial planners or investment advisors and look for the words “fee-only.”

My second recommendation is that you take to heart the findings of the Fidelity survey. Retirement will probably cost more than we think. When the majority of us retire, our current living expenses will remain the same or increase. That is different from the picture most of us have painted for our golden years. As one of my clients says about those years, “They call them golden because you’d better have a lot of gold.”

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