By Tom Lauricella
Published May 24, 2014 on WSJ.com
It’s not all golf and grandchildren.
Many people spend years planning for retirement and think they have it all figured out, until they actually retire.
Here are a few areas where retirees don't know as much as they think they do.
1. You’ll probably retire earlier than expected.
Sounds like a good thing, but it’s not. Among the most critical variables determining the size of a retirement nest egg is how many years money is saved before withdrawals start. These days, many financial plans assume delayed retirement, and to a large degree it's happening.
But not by as much as some have planned. Some 22% of workers say that they expect to wait until age 70 to retire, according to the most recent survey by the Employee Benefit Research Institute. But only 9% of retirees actually retired at that age, the survey found.
Meanwhile, EBRI has found that a sizable number of retirees leave the workforce earlier than planned for negative reasons. In the group’s 2014 survey, 49% retired early, but 61% of them said it was because of a health problem or disability. Many others are forced out of a job by changes at their company.
And for some early retirees, it was health problems of a spouse or other family member that led to leaving a full-time job.
By contrast, 26% of the early retirees told EBRI they had retired early because they could afford to.
For those who had banked on working longer to save more, “it means having to start drawing on their investments sooner than they had expected,” says Judy Ward, a senior financial planner at T. Rowe Price Group. In addition, it may mean signing up for Social Security sooner than planned, which can result in a smaller monthly benefit.
2. It’s not easy to get back into the workplace.
Meanwhile, retirees often find it hard to find new work. Roughly two-thirds of retirees say they plan to work in retirement, but just 27% report actually doing so, EBRI says. In part, the same dynamics that make it harder for older workers in general to find jobs also hinder retirees.
“Forced unemployment typically means they will seek re-employment comparative to the same job skills,” says Catherine Seeber, senior financial adviser at Wescott Financial Advisory Group in Philadelphia. “The problem is, they aren’t equipped to compete with the younger, more socially savvy job seeker, and employers aren’t eager to ‘pay the price’ for the experience.”
For some, the very health issues that prompted early retirement in the first place limit their ability to work.
3. You’ll regret buying that second home.
A dream of some retirees is to buy a second home to live in part time, and eventually sell their primary home. The advice from advisers: don’t. “Our experience with the second home has generally been that they are expensive, a hassle and a mistake,” says Neil Hokanson, a financial adviser in Solana Beach, Calif. “Clients could stay at the Ritz-Carlton when they go to their second-home area for far less, and with none of the hassle of frozen pipes, neighbor disputes, volatile housing values.”
That challenge gets magnified as retirees age and become less able to take care of one house, never mind two.
4. Medicare doesn’t cover what you think it does.
It’s no secret that health costs are a major burden, but many people wrongly assume that once they pass 65, Medicare will be there to deal with the problem.
Not even close. Traditional Medicare, the federal health insurance program, covers on average just 48% of an enrollee's health costs, according to the Kaiser Family Foundation.
There are routine costs Medicare generally doesn’t cover, such as eyeglasses and hearing aids. Dental care, where it’s easy to rack up bills totaling thousands of dollars for a root canal, isn’t covered. Retirees still have to pay deductibles, which when dealing with a chronic or serious illness can quickly run up the tab.
The biggest problem: Medicare doesn't cover the cost of a long-term-care facility or of home health-care aides. Shirley Whitenack, an elder-care attorney in Florham Park, N.J., says many retirees need a Medicare supplemental insurance policy, otherwise known as Medigap.
According to Kaiser, the average Medigap premium was $2,200 a year in 2010. But premiums vary by age. At 80, beneficiaries paid 52% more than 65-year-olds. “It is important to budget the cost of a Medigap policy in the retirement years,” Ms. Whitenack says. Even then, she notes, Medigap policies won’t cover nursing-home care.
5. Your budget is unrealistic.
A major part of retirement planning is figuring out how much money you’ll need. This usually focuses on generating the income needed to sustain a particular standard of living. Many people work on the assumption that they will spend less when they're no longer working.
It’s true lower taxes and the end of retirement-account contributions usually reduce income needs. But many advisers say retirees don't account for the general rise in out-of-pocket spending, especially when retirees are young and healthy.
“They have more time to go out, shop and travel,” says Heather Locus, a financial adviser at Balasa Dinverno Foltz, in Itasca, Ill. The risk then becomes putting a hole in a nest egg that can't be repaired.
The key, she says, is building extra room into the budget. “We try to offset this by helping our clients get a good idea of their spending the past few years before retirement and then adjusting for increased travel or hobby expenses.”
And then later in life, they allow for higher medical costs in a plan, she says.