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1. I’ll work until I’m 70
One of the most critical factors is determining how much you need to have saved before you begin withdrawing money is when you’ll retire. If your idea is to delay retirement so that you will have more money available, it may not work out the way you have planned. For example, some 22% of workers recently surveyed said that they don't expect to retire until they reach age 70. Unfortunately, only about 9% of retirees actually got to age 70 before retiring. The Employee Benefit Research Institute has also determined that a large number of retirees stop working earlier than they had planned for negative reasons. In the EBRI’s most recent survey, 49% of those queried retired early but 61% of them said it was due to a health problem or disability. Many others reported that they had been forced out by their companies or because of a health problem suffered by their spouses or another family member. On a brighter note, 26% of those who retired early told the EBRI that they had done so because they could afford to.
Of course, the downside to this is the fact that if you retire earlier than you had expected, you're probably going to have less money available to begin withdrawing. For that matter, you may even have to sign up for Social Security sooner than you had anticipated, which can yield a smaller monthly check.
2. I’ll just go back to work
The EBRI also reports that retirees often find it tough to get new work. While roughly 66% of retirees said they plan to work in retirement only about 27% actually found work. The problem is that the same factors that make it tough for older workers to find jobs is also true of retirees. If you were forced to retire, you will likely seek reemployment that requires the same job skills. The problem is that most retirees are not well equipped to compete with younger, more socially savvy employees. Plus, employers aren’t eager to "pay the price" for experience. In fact, experience can be a negative these days, especially in the technological sector.
If you do find work you may learn that it pays much less than you’re used to earning. While there are almost always jobs available in the hospitality and food service industries – even for older workers – these jobs often pay no more than $10 or $11 an hour. People who are used to pulling down $70,000 a year or more may find it very difficult to take one of these jobs given their low pay. However, depending on your circumstances you might find it best to swallow your pride and take one of those jobs as it could mean an extra $800 a month (less taxes), which could go a long way towards making your life easier and more comfortable.
3. I’m going to buy a second home
What is a mistake, very expensive and a hassle? In most cases it’s buying a second home. We know that the dream of many retirees is to have a second home to live in part time that would eventually become their primary residence. However, most advisors have one word for this: “Don't." In many cases you could stay for less at the Ritz-Carlton than a second home and would have none of the problems of neighborhood disputes, frozen pipes and volatile housing values. The challenge of maintaining a house gets magnified as you age and become less able to maintain one house let alone two. You could probably find a company or handyman to do much of that maintenance and those repairs for you, but you would need to factor this into your retirement planning. Good handyman where we live command at least $25 an hour. This means that just one day's worth of fixing things around the house, painting or repairing a stuck toilet could cost you as much as $175.
4. Medicare will cover all my healthcare costs
Do you believe that once you pass age 65 that health costs will no longer be a major burden? Well, that's not even close to reality. The federal health insurance program, Medicare, covers just on the average of about 48% of an enrollee's health costs. This is according to the Kaiser Family Foundation. For example, there are many routine costs Medicare usually doesn't cover. This includes eyeglasses, hearing aids and dental care. These are areas where it's easy to rack up huge bills totaling thousands of dollars for something such as a root canal. Plus, you will still need to pay deductibles that can quickly run up the tab when you're dealing with a chronic or serious illness. But none of this is even the biggest problem. It's that Medicare doesn't cover the cost of a long-term care facility or of home healthcare aides. What you will likely find is that you will need a Medicare supplemental insurance policy that's usually known as Medigap insurance. The average Medigap premium, according to Kaiser, was $2200 a year in 2010. But, of course, premiums change by age. As an example of this, 80-year-olds pay 52% more than 65-year-olds. This makes it critical to budget the cost of a Medigap policy into your retirement years. But do be aware that even Medigap policies won’t cover nursing home care.
5. I have a realistic budget
As you plan for those golden years a big part of that planning is determining how much money you'll need. This almost always focuses on generating the income you need to sustain your current standard of living. When many people budget for retirement they work off the assumption that they will end up spending less when they are no longer working. It is true that lower taxes and the end of contributing to a retirement account will reduce the amount of income needed. Unfortunately, what many advisers have found is that retirees don't account for a general rise in out-of-pocket spending – especially those who retire when young and healthy. These people have more time to go out, travel, golf and shop. This creates the risk of putting a hole in the nest egg that can never be repaired as once the money is gone it’s almost impossible to replace. A little "extra expense" such as $1000 worth of plane tickets to Bimini might not seem like much of a big deal when you're still earning money. But when you're living off your retirement savings, that's $1000 that you just can't easily replace.
So what’s the answer? The key, according to most retirement counselors, is to build extra room into the budget. This is especialy true if you will be retiring with unpaid debts. The way that you do this is by putting together a spreadsheet of how much you've spent each year for the past few years before you retired and then adjust for an increase in hobby or travel expenses. Of course, as you grow older, you will also need to allow for increased medical costs.
We used to teach a class where we taught the four levels of conscious competence that begins with "unconscious incompetence (you don't know what you don't know)" and ends with unconscious competence. The problem for many people planning for retirement is that they are conscious incompetents in that what they think they know is wrong. But with some extra foresight and planning, it is still possible to retire and enjoy those golden years you've been looking forward to for so long.