If you're conjuring up a retirement spent whacking a golf ball in a sunny clime, taking a leisurely drive across country in your motor home or reaching for an apricot cooler as you scan the horizon from a deck chair of a cruise ship, it's time for a reality check.
Chances are you won't have enough to cover your basic living expenses, much less afford a lifestyle that for many people about to turn 65 no longer exists, experts say. Shoring up your finances and changing your spending habits now -- while you're still working -- can help, but you may need to postpone retirement for as long as possible to avoid a financial crisis in your golden years. Getting advice from financial experts is a good place to start, they add.
"The old idea of retiring cold turkey at age 65, moving to Florida to play golf and eating early bird dinners doesn't work now that life expectancies are increasing," points out nationally known financial guru Matthew Tuttle, author of "Financial Secrets of My Wealthy Grandparents."
Tuttle, who oversees a wealth management firm, says that old ideas, "like buy and hold, getting more conservative as you get older, asset allocation, etc.," no longer work. "Those ideas were formed between 1982 and 1989 in a bull market, when values were rising 13 to 15 percent per year." Since then, there has been "10 years of nothing."
Medical advances have also forced a change in retirement thinking. "Life expectancy is increasing" -- so much so that Tuttle believes that in the not so distant future, it won't be uncommon for people to live into their 100s and, by then, be out of money. "Sixty-five will become middle age," he predicts.
Unfortunately, many people have no idea when or if they will be ready for retirement, according to a recent investment and retirement study by researchers at The Hartford, one of the oldest insurers and financial service providers in the United States. Sixty-nine percent of the nearly 800 people from across the United States sampled for the study were less than sure about how much income they would need in retirement. Some 37 percent had no idea of when they would retire, and another 27 percent said they would work as long as their health or the health of their spouse or significant other allowed.
How much money do you need to retire? "There's simply no one-size-fits-all answer," says financial planning expert Derrick Kinney, head of Derrick L. Kinney & Associates. "To begin, visualize how you see yourself living during retirement. If you see yourself working part-time or staying close to home, you could probably live off a percentage of your current income. But if you see yourself traveling the world, you may need just as much income as you make currently or even more," he says.
"One of the most common mistakes people make when planning for retirement is underestimating how much money they will need to live on," observes Kinney. "You can't treat your retirement account like an ATM. Taking out too much money too soon can cause a portfolio to lose value. Withdrawing no more than 4 to 5 percent of your investment portfolio for income is recommended."
Kinney recommends pre-retirees practice living on a retirement budget. "Take three months, and try living on how much you think you'll need. This lets you accurately test if your thinking is right while you have the safety of your current paycheck."
Pension planning expert Brett Goldstein offers a simple way to figure out how much money you will need at retirement: Take the annual income you wish to retire on, and divide that by 0.05. "This does not include the cost of health care or long-term care," he notes. To add that to the mix, use 0.25 instead of 0.05.
Relying on company pension plans instead of saving for retirement yourself is a mistake, says Goldstein, author of "The Retirement Crisis: Why You May Retire Into Poverty." "People automatically enrolled in a 401(k) tend to assume less responsibility for their retirement decisions," believing when the stock market goes down, they're automatically shifted into less risky investments."