Stop freaking out about retirement

How to worry less and plan better for a secure and satisfying future

Published: August 2014
Illustration: Carlos Aponte

The power of planning

Maybe it’s time to retire the word “retirement.” For millions of working Americans, the idea of scrapping work cold turkey one day is unfathomable. Reports that workers are saving too little—confirmed by their bank and 401(k) statements—leave many wondering whether the money will last through their lifetime. The beach-chair-in-the-sand retirement ideal is fast becoming an outdated cliché.

Consumer Reports readers feel the frustration. In a recent survey of more than 24,000 subscribers ages 55 to 75, only 29 percent of those within five years of retirement expressed a high degree of satisfaction with their retirement planning. About 20 percent said they couldn’t afford to stop working. Even among those who expect to retire, 40 percent said they hadn’t saved enough.

But the news from our already retired readers suggests that some of that worry might be unnecessary. Seventy-four percent said their expenses were in line with or less than what they expected before retiring. Seventy-one percent told us they were highly satisfied with their retirement. And 83 percent said they wouldn’t work again even if given the opportunity.

In fact, we may be better set for retirement than we’ve been led to believe. The oft-cited Social Security Administration publication series, “Income of the Aged,” showing retirees’ high dependence on Social Security, underestimates retiree income by about 15 percent, say researchers and former SSA officials Andrew Biggs and Sylvester Schieber. That’s because it excludes most income from individual retirement accounts and other savings. More sophisticated but less well-known models used by the SSA show that current and future retirees as a whole have relatively small savings shortfalls, Biggs says.

For doubters and late-to-the-party savers, planning and perseverance can make a difference. Moreover, our survey found that many readers are choosing an ever-widening middle path: reducing work hours but not stopping, opting for paid pursuits more about passion than a paycheck, and focusing on schedule flexibility. That gradual slowdown can be a balm to the mind and a boon to the wallet, and may help you live longer and be healthier and happier, too.

Start by being realistic

If you have postponed looking in your money mirror, you’re not alone. Sixteen percent of preretired respondents said they had done no financial planning at all.

Taking that first step can be scary, but knowledge is power. Determining how much you’ll need can help you reach your goals or adjust your expectations. And it turns out that getting real about retirement is a key to satisfaction. In our survey, retirees with less than $250,000 in savings who had properly estimated their financial needs were more satisfied than those with more than $1 million who had misjudged them.

Roberta Duncan, 60, says good planning and prudent saving allowed her to retire four years ago. At the time, her husband, Dave McRae, now 55, had just lost his job. The high cost of living in Cerritos, Calif., plus other factors convinced them it was time to make a radical move. The couple consulted their financial planner and determined that with Duncan’s teacher’s pension and continuing health coverage, they were well set up for a longed-for adventure, even though their nest egg was in the low six figures. So they sold their house, invested the proceeds, and bought a 26-foot recreational vehicle. For the past four years they have been road warriors, logging about 70,000 miles.

To get a preliminary read on your retirement needs, use an online calculator. More than one-third of the respondents who expect to retire in five years told us they had tried one. A comprehensive one we’ve tested is T. Rowe Price’s free Retirement Income Calculator. We like its straightforward approach.

An important figure you’ll need to enter into any calculator is the percentage of income you’ll need in retirement. Taylor Gang, a certified financial planner and principal at Evensky & Katz in Coral Gables, Fla., echoes many advisers who say that expenses in the early years of retirement can equal or even exceed those while working. “You have more time to play golf and travel,” Gang says. “That costs money.” Our own survey supports an 80 to 90 percent rule of thumb. Though a third of retirees reported no change in their spending in the year they retired, 44 percent said their expenses were lower. Most saw a drop of between 10 and 20 percent.

Once you have an estimate, talk with a financial adviser. We recommend finding a fee-only planner at websites such as Garrett Planning Network and the National Association of Personal Financial Advisors.

Play catch-up the right way

Daniel Walk knows that the early bird lays a bigger nest egg. The 25-year-old from Pittsburgh taught himself investing as a teenager, and now his holdings are in the mid-five figures. Walk, who’s studying to be a chartered financial analyst, recently showed his 23-year-old sister Sarah, a musician, how to invest in low-cost index mutual funds through a Roth IRA. That works well for younger and lower-earning investors; they don’t pay taxes while the money grows and in most cases even upon withdrawal, when their tax rates presumably will be higher.

Our survey of retirees corroborates the wisdom of that approach (see “The benefits of an early start," below).

But even if you’re far behind, you still can start to get a foothold. Making the maximum contribution to a 401(k) or 403(b) account will build up savings fast. Contributing $10,000 per year from age 50 through 55 would add about $192,000 to your portfolio by age 67, given a historical average annual rate of return of 8.3 percent for a half-and-half mix of stocks and bonds. (A more conservative portfolio—80 percent bonds, 20 percent stock—would grow by 5.5 percent to almost $131,000.)

From our survey: The benefits of an early start

Among retirees in our survey who said they expected to retire within the next five years, those who invested early had far more in savings than those who began late. Waiting until your 40s to start saving will usually reduce your retirement funds by half. Notably, a sizable 14 percent in our survey didn’t start saving until they were in their 50s or 60s.

Try to delay claiming Social Security

Social Security made up a major portion of income of our retired survey respondents. More than half said it was more than 25 percent of their income.

As the Social Security program is currently designed, waiting to claim benefits is the best guaranteed retirement savings plan around. Workers who delay filing until they’re 66—the full retirement age for those born between 1943 and 1954—increase their monthly benefits by 8 percent per year until age 70, or 32 percent over four years. But filing early reduces benefits. A worker whose full retirement age is 66 would have his monthly check cut by 25 percent by filing at 62, the earliest age for eligibility.

Claiming benefits late wasn’t the norm among our readers. Of those already retired, 55 percent had started taking benefits at 62. But 52 percent of those not yet retired told us they would claim their benefits at full retirement age; an additional 29 percent said they’d wait even longer.

Expect the unexpected

At age 65 your chances of living past 90 are one in four, the Social Security Administration projects. In our survey, 43 percent of those not yet retired reported a fear that they’d outlive their money.

Many costs later in life are likely to be health-related. Based on a survey of retirees and preretirees, Fidelity Investments recently projected that an American couple retiring at an average age of 65 would accumulate $220,000 in unreimbursed medical costs during retirement. Stop work at age 62—before Medicare eligibility—and that figure jumps by $17,000 per year; continuing to work to age 67 reduces it by $10,000 per year.

Longevity insurance is a type of annuity that can address that challenge. You pay a single insurance premium up front early in retirement. Then, when you reach the age you have chosen to begin payouts, the policy pays a regular monthly amount for the rest of your life. That could boost your confidence about spending the remainder of your money knowing you’ll be covered later.

The thought of plunking down a chunk of your retirement savings toward an uncertain need may not be appealing, but a recent Treasury Department announcement could make it more palatable. IRA and 401(k) participants can now invest 25 percent of their account balances—up to $125,000—in longevity annuities within their retirement plans without having to start taking the money out at age 70½, when required minimum withdrawals must begin. If they die prematurely, their heirs can get the premiums that weren’t disbursed in annuity payments. “It’s like another level of Social Security, but from an insurance company,” says Keith Singer, a financial planner in Boca Raton, Fla.

Consider a gradual retirement

Increasingly, the solution to retirement anxiety is to keep working. Eighty-three percent of preretirees in our survey expected to work full- or part-time.

The phenomenon of a gradual retirement isn’t so new. Each year since 2007—before the economic downturn—about a quarter of our fully retired respondents have reported starting their retirement by working less, not stopping entirely. They reduced hours at their main job, worked part-time at a new one, or started a business. They worked for a median of four years. The most satisfied partly retired respondents worked 9 hours or less per week.

Laboring longer provides more income and delays when you begin withdrawing from savings, allowing more time for growth. And for many, it keeps those synapses firing.

Jack “Trip” Rockafellow, 70, who retired from a legal career in 2006, is now using his time to scratch an old itch—and make a bit of cash. Since mid-2013, the Dobbs Ferry, N.Y., resident has been working almost weekly as an extra in movies, TV shows, and commercials in and around New York City. He usually earns $88 for 10 hours of work per day. Occasionally, he’s featured more prominently. (He walked a character named Mia down the aisle in a “Nurse Jackie” episode.) He doesn’t clear much, but he finds the work more fun and less stressful than being a lawyer.

Be aware, though, that part-time work has an impact on Social Security. If you haven’t reached full retirement age but have claimed your benefit, Social Security holds on to $1 for every $2 you earn above $15,480. When you reach full retirement age, it gives that deferred amount back, adding to your monthly benefit.

Working shorter hours at the same employer could affect pension benefits or employer-based group health insurance, so check with human resources before you commit to part-time work.

From our survey: Expectations meet reality

Baby boomers might imagine a future retirement that involves work of some kind, but the reality might be strikingly different. Eighty-three percent of those in our survey who expected to retire within the next five years said they would probably ­continue to work in some capacity. But among retirees no longer working full-time, almost three-quarters weren’t working at all. And 83 percent of those reported no interest in ­working again.

Have a plan B

Remember what they say about the best-laid plans? Most of the surveyed preretirees assumed that they would work after retiring, but only a third of retired survey respondents said they actually did. Health concerns or the needs of a partner might interfere. Or you might just decide that you have had enough. Whatever the case, you might need to adjust your expectations and your budget.

Wilma (Billie) Andrews, 64, had a revelation three years ago while toiling as a systems analyst. She was tired and ready to quit, but she kept working to pay for future bucket-list trips. “But my dreams were bigger than my bank account,” she says.

Finally, Andrews, who lives in Seven Hills, Ohio, decided to punt those goals and retire. Right away, she felt relief. She says she now wakes up almost every day with anticipation. She visits grandchildren, gardens, and does home-improvement projects. She has ridden her motorcycle to Florida. Her financial planner said that with her small pension and savings of about $300,000, she should do OK. “I’m not where I thought I would be, but it’s fine,” she says. The decision to leave work “was a tiny light at the end of the tunnel that just got bigger and bigger.”

Smell the roses

Your mother probably told you that money doesn’t buy happiness, and our data prove it. Our survey found that retirement satisfaction was significantly higher among households reporting between $400,000 and $1 million in savings than among those with less. But happiness didn’t rise much more for those who had $1 to $2 million. And we found that people are often perfectly content with far less. In fact, retirees with less than $250,000 in savings who were highly engaged socially were more satisfied with their circumstances than retirees with $1 million or more in savings who were not. And numerous studies have found a connection between social engagement and better cognition in elderly people.

Jim Plummer, 74, and his wife, Ruth, 72, have assets that fall below the $500,000 to $1 million sweet spot. But the couple, who live in Highland, Ill., have made the most of their retirement years by volunteering. Several times each year they travel to different parts of the U.S. to help a Christian group that rehabilitates buildings and houses for individuals and families. Sometimes they’re hammering boards, other times they’re planting gardens. They’re meeting like-minded people and feeling good about their contributions.

“It’s neat doing what you know how to do, meeting great people,” Jim Plummer says. “I tell friends who want to retire, you can’t just sit around and watch TV. Have something you really want to do.”

Editor's Note:

This article also appeared in the October 2014 issue of Consumer Reports magazine.

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