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New retirees: Don't let surprises trip you up

By Walter Updegrave, senior editor

(Money Magazine) -- Question: What are the biggest issues new retirees tend to underestimate? -- Chris Towne, Harmony, Pa.

Answer: No matter how diligently you plan for your post-career life, surprises can still trip you up. More than likely, that isn't because you've overlooked a nettlesome issue altogether. Rather, it's just hard to comprehend how challenging certain aspects of retirement life can be.

Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

For example, new retirees often underestimate how tough it can be to make their savings last a lifetime. One reason is that because we so frequently hear that we'll need only 70% to 80% of pre-retirement salary, we blithely assume our spending will drop sharply once we stop working.

That's not necessarily the case. Indeed, the Employee Benefit Research Institute's 2010 Retirement Confidence Survey found that while almost 60% of workers expected to spend less in the first five years after retiring, fully half of retirees said their spending didn't drop at all. And of that group, 26% reported that their spending actually rose.

That's no shock to Bud Hebeler, a 77-year-old retiree who created Analyze Now, a site that offers retirement advice. "You're going to want to travel, see your children and grandkids -- all that takes money," he says. Throw in unexpected outlays and steep health care costs, and it's no surprise your spending may not fall much, if at all.

This is compounded by what behavioral economists call "money illusion," a fancy way of saying we don't think in inflation-adjusted terms. Yet even modest inflation can cut your purchasing power nearly in half in 20 years.

One of the reasons you may not be worrying that much about how inflation will affect your long-run spending needs is that you probably underestimate how long you'll live to begin with.

A 2006 report from the Society of Actuaries found that only 29% of retirees and pre-retirees figured they'd live longer than the average life expectancy. The reality is that you have around a 50% chance of outliving the averages.

So how do you avoid exhausting your savings? Start by going to the Retirement Income Planner tool, which offers a budget worksheet that adjusts your outlays for inflation.

Then go to T. Rowe Price's Retirement Income Calculator -- which assumes you'll live to age 95 -- to get an estimate of how long your money might last. Repeat this every year or so to see if you need to reassess your lifestyle.

Retirees also underestimate how tricky the social transition away from the workaday world can be. John Nelson, author of What Color Is Your Parachute for Retirement?, suggests creating new social networks by establishing ties with people or groups that share your interests (say, gardening or sports) or values (environmentalism, community service).

After retiring last year, Ron Manheimer, 67, found himself in the same position as the people who used to take the workshops he ran as director of the North Carolina Center for Creative Retirement -- wondering how to find meaning in the next stage of life.

In his case, he finished writing a book he abandoned years ago. Since then, he and his wife, Gail, have run one-day seminars for financial advisers who also want to help clients with retirement lifestyle decisions.

"The transition into retirement was harder than I thought," says Manheimer, "but it's a process, and I'm still working at it."

And that's ultimately the best attitude to take, since things rarely go as planned in retirement. To top of page

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