It can be nice to indulge in a fantasy from time to time.
Wouldn’t it be great to, say, be as wealthy as Oprah, as smart as Einstein—and have the pipes of Prince, to boot?
Of course, there’s a difference between entertaining a daydream and living a delusion—especially when it comes to something as important as your future retirement.
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Unfortunately, research shows that there’s often a big disconnect between what we envision for our retirement—and how it actually pans out.
Case in point: The Employee Benefit Research Institute’s (EBRI) 2015 Retirement Confidence Survey found that 67% of workers plan to work into retirement, but only 23% of retired people report actually doing so.
And 55% of workers believe they’ll have a pension to rely on in retirement—even though only 32% have one now.
Which raises the question: Are we all a little too delusional when it comes to those golden years?
To get at the answer, we rounded up some key signs that you may be in need of a retirement reality check—along with helpful tips for snapping back into reality.
Sign #1: You Picked an Arbitrary Retirement Number
You’ve already painted the picture: For your 65th birthday, you’re going to celebrate with a big retirement party—and a round-the-world cruise.
Here’s the rub: You’ve never bothered to check whether you’re on track to get there.
“This is a really common problem,” says Tony Drake, a Certified Financial Planner™ (CFP®) and owner of Drake & Associates, LLC in Waukesha, Wis. “Too few people have actually put pen to paper to see if the numbers can back up their goals and dreams.”
And chances are, your numbers probably can’t back them up: According to the EBRI survey, 57% of workers have less than $25,000 saved for retirement—and nearly one in three don’t even have $1,000.
RELATED: What’s Your (Retirement) Number?
How to Snap Out of It: The question of just how much is truly enough for retirement will vary depending on your individual circumstances, but a good place to start is with a retirement calculator that can help show you how big of a nest egg you may need to retire by your target age—as well as how much retirement income your current level of savings could provide.
To get at an even more personalized estimate, Drake asks his clients specific questions about how they envision their retirement: How many annual international trips do they plan to take? How much money do they want to set aside for their grandchildren? What types of passions do they want to pursue?
“Some retirees can get by on next to nothing, but others may need a decent income,” Drake says. “It all depends on their goals and what they want to accomplish in their retirement years.”
You can also consider using a common financial planning rule of thumb of aiming to replace 85% of your current income in retirement.
After you arrive at a comfortable number, just remember to revisit your game plan periodically to ensure you’re making progress.
“Once you’ve set up a plan, the heavy lifting is done,” says Patty Cathey, an investment adviser and owner of Denver-based Smart Retirement, LLC. “Then take a couple of weekends a year to make sure you’re staying on track to reach your goals.”
If your retirement plan is ‘I am going to work forever,’ that’s what we call hope—and that's not a safe strategy.”
Sign #2: You Think You’ll Work Until You’re 80
Who are you calling old?
According to a 2013 UBS Wealth Management Americas survey, only a third of respondents aged 60 to 69 considered themselves “old.” In fact, it wasn’t until people reached their 80s that the majority reported feeling that way.
But while it’s great that 80 is the new 60, youthful exuberance isn’t a job strategy: Based on 2015 Gallup research, 61% of younger baby boomers say they plan to work until 65 or older, but only a third of today’s oldest boomers—those who are 67 and 68—are actually still working.
“I had one client who initially planned on working until 75, but at 60 found that he was unable to find a new job at his previous pay level,” says Sarah Asebedo, a CFP® and an assistant professor at Virginia Tech. “The permanent loss of income required him to rethink his lifestyle—and he wasn’t prepared for the need to cut expenses.”
How to Snap Out of It: For starters, assess whether your job is conducive to a long work life by asking yourself one key question: At what age are people in my industry actually retiring?
Based on a recent study from the Center for Retirement Research at Boston College, the answer may surprise you.
The researchers culled occupational data to determine which industries were more likely to require early retirement because of a decline in skills due to aging. At the top of their list: pilots, manufacturing assemblers, dentists and designers, to name a few.
The lesson? While you may think you’ll still be going strong at 75, your body and choice of occupation may beg to differ—so you should consider saving as if you’ll call it quits at the standard retirement age, which is 67 for those born after 1960.
“A lot of people think, ‘I love what I do and I can’t picture not working, so I don’t need to plan for 30 years of retirement.’ ” Drake says. “If your retirement plan is ‘I am going to work forever,’ that’s what we call hope—and that's not a safe strategy.”
Sign #3: You Believe Retirement Will Be One Long—Carefree!—Vacation
On the flip side, maybe your plan isn’t to work forever—but to party forever.
After all, you no longer have to worry about using up vacation days, because every day is a vacation day!
Not so fast.
In a 2011 Harvard School of Public Health survey, 59% of pre-retirees said they expected to do more traveling in retirement, yet only 26% of retirees actually reported doing so—and 34% said they did less traveling than they used to.
How to Snap Out of It: There are two main questions to ask yourself before you start packing your bags.
The first: Are you accounting for all those trips in your retirement savings strategy?
“The danger with that [vacation] mentality with retirement is that you may spend like you are on vacation 24/7—and then quickly watch money dwindle from your bank accounts,” Cathey says.
That’s why creating a realistic budget that takes all your retirement goals into account is so important.
“Some retirees will need to save a lot more, depending on their lifestyle and who depends on them [for support],” Cathey adds. “[But one of the] most important parts about getting ready for retirement is having consistent cash flow.”
So if you’re barely putting away enough now to cover basic expenses in retirement, you may need to reboot your savings strategy to account for those jaunts to the Virgin Islands.
The second question: Is all that leisure time really what will make you happy?
“All of the engagement, community, purpose and meaning that an individual had in their work life needs to be replaced with other things in retirement that are more meaningful than simply more travel,” Asebedo notes.
She offers the example of a client who, after consistently working 60-hour workweeks, started to travel and golf more in retirement—only to find it just made him more depressed and stressed than ever.
“After further exploration, the client realized that work had brought a great deal of meaning and purpose and a social life that was suddenly lost due to retirement,” she explains. “Over time, he found new ways to bring those psychological elements back [into his life] through volunteering, professional memberships, hobbies and family.”
According to a recent poll, 70% of Millennials believe they will need less than $36,000 per year in retirement—even though those 65 to 74 currently spend $46,757.
Sign #4: You Assume It Will Be Easy to Cut Costs in Retirement
Perhaps you’re not quite as on track as you thought you’d be for your life of leisure. But that’s O.K., because once you’re retired, it should be easy to cut an expense here and there, right?
Not so much.
While it’s true some expenses may decrease—say, commuting costs and work lunches—others might go up a lot, like health care, which could hit upward of $220,000 for couples over the course of their retirement, according to estimates by Fidelity.
For those who are decades away from retirement, this could prove to be a rude awakening: A recent study by the Insured Retirement Institute found that 70% of Millennials believe they will need less than $36,000 per year in retirement—even though those 65 to 74 currently spend $46,757, on average.
How to Snap Out of It: You may assume that by the time you retire you’ll have paid off your biggest bills—but that may not necessarily be the case.
A 2014 analysis by the Consumer Financial Protection Bureau found that 30% of homeowners 65 and older carry mortgage debt. And the LIMRA Secure Retirement Institute reports that those between the ages of 65 and 74 have almost six times the student-loan debt of people in their age group a generation ago.
“If you carry a lot of fixed expenses into retirement, it will be harder to cut back than if you have mostly discretionary expenses,” Asebedo says.
It makes sense, then, to try to tackle some of your big fixed costs well before you’re close to retirement—say, by working in an additional mortgage payment a year.
“That extra payment could take about six years off a 30-year mortgage,” Drake says.
Another idea to consider? Take your pared-back retirement budget on a test run.
“Spending a year or two practicing living on your retirement budget before you actually retire,” Cathey says, “is a good way to see whether [your cost-cutting] works.”
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. LearnVest, Inc., is wholly owned by NM Planning, LLC, a subsidiary of The Northwestern Mutual Life Insurance Company. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Unless specifically identified as such, the individuals interviewed or otherwise listed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services and the views expressed are their own. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.