Real-World Retirement Guide
The road to retirement is lined with false expectations and overblown fears. To find your way there, you first have to get real about what's involved
By Walter Updegrave

(MONEY Magazine) – We all know that the traditional view of retirement—a time of quiet contemplation interrupted by the occasional brisk game of shuffleboard—has given way to a version that can include anything from shooting the rapids on the Snake River to trekking the Himalayas to launching a post-career career.

But while we've updated our vision of how we may live after retiring, many of us are still mired in the past when it comes to planning for retirement. Sure, we know that unlike previous generations we can't rely on generous Social Security benefits or fat corporate pensions. We've heard the message about how the double-digit investment returns that once promised to make up the difference are gone. But few act on this wisdom—or consider that a life spent taking trips down the Snake River could cost more than your working life. These days, the lifestyle you can afford in retirement largely depends on you—how diligently you save, how wisely you navigate today's challenging markets and, most important, how realistic you are in the assumptions you make about your retirement planning.

If anyone needed a wake-up call to this new reality, Federal Reserve chairman Alan Greenspan provided a whopper of one this summer. Speaking before a gathering of policymakers in Jackson Hole, Wyo., the Fed chairman said he feared that the government may have "promised more than our economy has the ability to deliver to retirees" in Social Security and Medicare benefits and that we may have to "recalibrate our public programs so that pending retirees have time to adjust through other channels." Translation: Future retirees could see benefits in these programs scaled back and should prepare to pick up the slack by kicking in more.

Clearly, it's time to reassess your retirement planning and make sure it reflects today's realities. This special section will help you do just that. We begin with a seven-question quiz to let you judge whether your assumptions are well-grounded in areas ranging from the likelihood of getting Social Security benefits to the role that work plays in retirement. Once you've "recalibrated" those assumptions, you can then go to a retirement planning calculator such as the one at MONEY's website ( to get a sense of how much progress you're making—and what you can do to improve your prospects.

For more insights on how to plan, turn to "Postcards from Retirement" on page 102, where recent and long-time retirees talk about how the reality of leaving the workplace measured up to their expectations. Finally, for those who are already retired or are on the verge of doing so, we provide a seven-page pull-out section that outlines strategies for making sure your retirement assets last a lifetime.

Ultimately, of course, you can never be completely sure how your retirement will pan out. But this much is certain: The more realistically you plan for the future today, the greater your chances of achieving your dream, whatever it may be, tomorrow.

[*] Answers

1 You need $1 million or more to retire comfortably. Answer: False. Yes, it would be wonderful to accumulate a seven-figure nest egg. But for many of us that goal is unrealistic—and unnecessary. Fact is, most Americans can easily call it quits with assets well below the $1 million mark. And if you don't build up as much as you had hoped, there are a variety of moves you can make to compensate.

If, for example, the value of your home has increased dramatically, you may be able to downsize to smaller digs and come away with a tidy profit (tax-free, provided the gain is $500,000 or less if you're married, $250,000 if single). Not interested in selling the homestead? You can still convert your home's equity into tax-free monthly income by taking out a reverse mortgage. To see how much income you may qualify for, check out the Loan Calculator at AARP's Reverse Mortgage Web page (

And there's always the option of relocating to an area with lower living costs. By clicking on Moving & Relocation in the House & Home section of the msn site (, you can see how much more (or less) your income can buy in different cities around the country.

2 Your expenses will definitely drop during retirement. Answer: False. The accepted benchmark that you can live comfortably on 70% to 80% of your pre-retirement income comes out of the "replacement ratios" that Georgia State University and Aon Consulting began compiling back in the 1980s. The basic idea: Because taxes and job-related expenses go down after you leave the work force and you no longer have to save for retirement, you can live on less.

But as sound as that theory may be, you've got to remember that we're dealing with averages here. You can't blithely apply the 70% rule to your situation. If, for example, you're carrying a huge mortgage that you'll pay off before you retire or you're putting a big part of your income toward college tuition bills, you may be able to get by on much less than you needed during your working years.

On the other hand, if you plan to travel to all the places you wanted to see but couldn't while you were chained to your nine to five, you could easily end up spending 100% or more of your pre-retirement income.

There's no way to forecast future expenses to the penny. But researchers have found that people who take the time to plan a budget are much more likely to come away with an accurate assessment—and less likely to err on the downside. So when you are within 10 years of retiring, estimate your future expenses as best you can. (Vanguard has a downloadable worksheet in the Retirement Planning section of If retirement is more than a decade away, there are too many unknowns to create a budget. In that case, figure you'll need at least 90% of your income. If shooting for a high goal means you'll save more than you'll need, you can always live larger in retirement.

3 What can you expect to earn on your investments? Answer: d. 6% to 8%. We all got a bit spoiled in the '80s and '90s. Annualized gains of 18% for stocks and 9% for bonds can do that to you. No one can predict future returns with pinpoint accuracy. But given the still relatively high price/earnings ratios in stocks and modest yields in the bond market, the consensus among many experts is that we're likely to see long-term annual returns in the neighborhood of 8% to 9% for stocks and 5% to 6% for bonds. You may be able to do slightly better in more volatile assets such as small-cap stocks and high-yield (a.k.a. junk) bonds. But for a diversified portfolio, you're probably looking at returns of 6% to 8% a year, depending on your stock and bond mix and on how tightly you rein in expenses.

Clearly, lower returns mean you'll have to sock away more cash. But this is doable. And as the chart at left shows, the sooner you begin making the adjustment, the easier it will be.

4 How many years must your investments last? Answer: d. 30 or more. That's right. For better or worse, you could end up spending almost as much time in retirement as you spent in the workplace. But many of us underestimate how long we'll live.

Why? One reason is that the concept of life expectancy can be a little tricky. A 65-year-old man in decent health has a life expectancy of another 20 years. Many of us, however, take that to mean that if we're 65 we should plan on living to 85. "People see life expectancy as a number that represents how long they as individuals are going to live," says Richard Austin, a retirement income consultant in Tampa Bay. In fact, when actuaries calculate life expectancy, they're estimating the point at which half the people of a certain age group will have died. Which means the other half will still be alive, some for many more years. (To find out just how long a 65-year-old can expect to live, see the chart on page S2 of the "Tapping Your Nest Egg" pull-out section following page 112.)

Obviously, not all of us are going to live beyond our life expectancy. But since our life span is ultimately unknowable, it's prudent to plan to live to 95, if not longer.

5 You can't count on Social Security. Answer: False. Pretty much everyone agrees that our Social Security system faces daunting problems, the biggest being that we'll have fewer workers supporting each retiree as the boomers leave the labor force. As a result of this demographic mismatch, the money flowing into Social Security's coffers will fall short of what's needed to fund retiree benefits in 14 years, at which point the system will have to tap the Treasury bonds in the Social Security trust fund.

But the notion that the system is in such bad shape that future retirees might receive little or nothing is totally overblown. Even if the trust fund runs dry—which it's now projected to do in 2042—there would be enough money coming in from payroll taxes to fund 73% of currently scheduled benefits.

Nonetheless, it's certainly possible that future retirees will see their benefits trimmed or postponed. After all, that's what happened the last two times the system ran into serious trouble (in 1977 and 1983).

Social Security being the political hot button that it is, it's virtually impossible to predict what changes, if any, may occur. As a practical matter, it makes sense to assume that you'll get your currently scheduled Social Security benefits (available via the calculator at if you're within a couple of decades of leaving your job—and to assume you'll get less (but not nothing) if your retirement is further off.

6 You can save less if you plan to work in retirement. Answer: False. The concept of retirement as a time when you abruptly go from a life of work to no work has pretty much gone the way of big tail fins and beehive hairdos. When aarp surveyed 1,200 baby boomers last year, almost eight in 10 said that they expected to take a job after retiring (see the chart below).

But while working in retirement can certainly supplement your post-career income, not to mention keep you more socially engaged, it would be a mistake to make such earnings a core component of your retirement plan.

One reason is that moving in and out of the work force at will may be hard to pull off when you hit 70. The earnings that are so easy to plug into a retirement calculator now might never materialize. Notre Dame economics professor Teresa Ghilarducci also questions whether working in retirement is going to be as fulfilling as many of today's pre-retirees believe. "Jobs for older workers generally don't pay as well as those for younger workers," says Ghilarducci, "and the raises aren't as good."

So when forecasting your retirement income, keep projections for a paycheck from a job on the modest side. And whatever you do, don't use potential future earnings as an excuse to save less. If you do, you may very well end up having to work during retirement whether you want to or not.

7 It's enough to plan just for the financial aspects of retirement. Answer: False. "We see people who've given all sorts of thought to the financial side of retirement," says Ronald Manheimer, executive director of the North Carolina Center for Creative Retirement. "But they haven't dealt at all with the lifestyle part of the equation." The result: After the first giddy sensations of freedom fade and a life of golf or tennis begins to lose its allure, many retirees find themselves struggling to find activities that are meaningful.

All of which is to say, if you want to enjoy a fulfilling retirement, you've got to do some planning about how you'll actually live. The way to start is by doing what Manheimer calls "envisioning your retirement," essentially thinking long and hard, down to the smallest details, about where you'll live and how you'll spend your time day to day. Is there a hobby you've wanted to devote serious time to? A job you've always wanted to try? If your spouse is still working, will that delay your globe-trotting plans? And if you're both retired, how will spending more time together affect your relationship?

But don't stop there. Give your ideas a test spin to make sure your vision is realistic. Manheimer remembers one man who attended one of his seminars who loved art and saw painting as his core activity in retirement. When he took art classes after retiring, however, he discovered that he simply wasn't adept enough to find it satisfying.

In short, whether it's the lifestyle or financial aspects of retirement, the foundations of your planning must be grounded in reality. Otherwise, the grand retirement you envision may turn out to be nothing more than a facade.

How realistic are you?

Take our retirement planning quiz to find out. The seven questions below deal with core assumptions we make about retirement. Respond to each and then read the answers that follow to see whether your planning is based on today's realities—or whether you need a retirement planning attitude adjustment. [*] Answers on the facing page

Expect less, save more A lower expected return means that you'll have to rev up your saving to amass a sizable nest egg.

NOTE: Figures rounded to nearest $5. SOURCE: MONEY research.

You'll work, but not too hard Most boomers expect to take a job in retirement. But it's unlikely to be high paying or full time.

79% of boomers say they will work in retirement Here's how: