It seems to be a common theme at cocktail parties:  “With the way the market is going now, I don’t think I will ever be able to retire.”  But is it really that bad? What are the retirement challenges you need to prepare for?

Million Dollar Nest Egg?

At first glance, it certainly looks like it.  Many financial advisors quote the “4% rule” to their clients:  “Don’t spend more than 4% of your nest egg each year or you may run out of money during your lifetime.”    A little quick math indicates that, if I want to spend only $40,000 per year in retirement, I need a nest egg of $1,000,000!  And there’s no way I can get there.

That’s just the math.  But we need to consider a few more things.

Social Security

Start with Social Security.  If we are close to retirement, there’s not much we can do to change the overall benefit.  But if we can delay taking it, we can increase the size of our monthly paycheck by up to 8% a year.  Where else can you get a guaranteed 8% per year?  For example, if you were to get a check for $18,000/month at age 62, and you could wait until age 70, the size of that check would grow to almost $32,000!

Saving During Retirement

How about saving just a little more each month?  When the car is paid off, can we continue to pay the same amount to our savings account, rather than to the loan company?  If you are currently paying college expenses, and your child finally graduates, can you discipline yourself to put the same amount into a savings account?  These are choices we can make during each step of our journey towards retirement, and they are not always the easy ones.

How Much Will You Actually Need?

Try to be honest with yourself about what you expect your retirement to look like.  If you are an active person, will you continue to work to fill your days?  Even a little part-time work can provide a level of cash flow that will help defray some expenses. Will you downsize to a smaller house in a less-expensive area?  Will you continue to same activities you are currently doing?  Will you travel more?  For how long?

If you are like most of us, your first 10 years of retirement will probably be a lot different from the next 10, and the 10 after that.  Even if you don’t “slow down”, you may find that you’ve done all the exploring you need to, and want to spend more time with ordinary, everyday experiences, such as socializing with friends to keep you happy.

We will be spending a lot less money during the latter years of our retirement.  We shouldn’t assume that we need the same fixed amount every year during the entire period.

If we carefully examine our future, we may find that our current financial position is not as bad as we originally thought.  If it turns out that we are a little short, at least we know where to cut, and therefore have removed the uncertainty from the equation.  And that uncertainty is one of the greatest causes of stress.