Dear Friends,

Here’s some shocking- shocking(!)- news for you: More than half of American adults are either “very” or “extremely” concerned about being financially prepared for retirement, according to financial firm ING. Almost one in four of us say planning for retirement is “boring” and nearly as many characterize the process as “difficult.”

No kidding.

First of all, you’re supposed to know how large a nest egg you’re going to need. To do this, you have to estimate your living expenses which should, of course, incorporate projected health care costs and inflation. As if there’s any way to know what those will be.

Even if you come up with a number, you’ve got to figure out how to invest your savings. What percentage should be in stocks? U.S.? Foreign? How should you divide it among small, medium, or large companies? What about bonds? Should you invest in U.S. treasuries? Lately, there have been more attractive opportunities in non-U.S. fixed income.

Another essential- and unknown- piece of the puzzle is how long you will live. You can save a lot less and invest more conservatively if your portfolio will only have to produce income for ten years versus 30.

In an online survey, Scottrade found that more than half of the 45-64-year olds who responded said they don’t think they’ve saved enough. Then again, 38% admitted they had no idea how much they’ll need.

A Bank of America poll that uncovered the unsurprising fact that retirement planning isn’t easy, also found that about a third of Baby Boomers think they’re “on track” in terms of saving, with another 36% admitting they started late, but feel they’re gaining ground.

No matter how old you are or how much you have or haven’t saved for retirement, I am going to stick my neck out and make two predictions:

Prediction No. 1:  Retirement is going to be more expensive than you think.

Some of the rationale for this is obvious- inflation. Over time, things get more and more expensive. (Those of you who remember when unleaded gasoline was 39-cents a gallon can vouch for this.) In addition, health-related costs have been rising faster than the overall inflation rate.

But I’ve got another source: current retirees. Whether they were in their mid-50s or late 80s, an overwhelming number responding to a Sunlife Financial survey reported being “surprised by the higher-and-expected expenses they have incurred.”

Don’t believe me. Ask your Aunt Thelma.

Prediction No. 2: Your biggest retirement expense will not be health care

Unless you have a severe chronic illness, you can expect housing-related expenses to be your biggest expense throughout retirement. It doesn’t matter whether you have paid off your mortgage, rent, or reside in an assisted living facility. According to the national Consumer Expenditure Survey, “housing” consumes roughly a third of a retiree’s budget.

In fact, health-related expenses are not even among the top three for the newly-retired. After housing, transportation and food represent the categories “young” retirees (65-74 years old) spend the most money on.

This shouldn’t be surprising. These days, compared to previous generations, new retirees tend to be healthier and lead more active lives which include travel, second careers, and hobbies.

In general, only after you reach age 75 do medical/healthcare costs move up into third place. (“Food” becomes No.2.) If it’s any consolation, by then your total expenses start to decline significantly, relfecting the fact that you are slowing down physically.

So what’s a boomer to do in light of the fact that preparing for retirement is difficult, complicated, and inherently unpredictable? If you’re the do-it-yourself type, visit at least three of the internet-based calculator available from financial firms such as T. Rowe Price, Fidelity, and Vanguard. Each will give you different results. They have to- they’ve all got different assumptions built in. But at least this exercise will give you a range of probably scenarios and nest egg amounts.

If you want a more personalized picture of where you need to be, make an appointment with an experience financial advisor who, with more sophisticated software, will be able to run a detailed analysis.

In either case, you’ll need to re-evaluate your plan on a regular basis, probably at least every two years. Is your portfolio earning what you expected? What about your expenses? Are your withdrawals realistic?

This kind of re-assessment is crucial whenever you run into a bear market. Continuing to take significant withdrawals from a portfolio that is losing value is a sure recipe for running out of money. Seven years into this decade we’ve already had two sharp stock market declines (so far, only the one that began in early 2000 officially qualifies as a “bear” market). If history repeats itself, tomorrow’s retirees can expect to experience six significant market declines over an average 30-year retirement. Mid-course corrections are inevitable. A diversified portfolio is a must.

So is the ability to filter out the “noise.” This includes those extreme predictions by so-called market gurus as well as the non-stop barrage of political rhetoric. Both distort the facts. And even the facts may have little, if any, relevance to your particular situation.

For instance, while a weak dollar makes it more expensive to buy a BMW, it helps U.S. automakers and other American firms sell their products overseas. Lower interest rates hurt you if you keep a lot of money in the bank, but they make it more affordable for others to buy homes, cars, and other items that are typically financed. It all depends upon which side of the ledger you’re on.

Through the end of last month, the Dow Jones Industrial Average and S&P 500 Index were both down 11% compared to the high hit on Oct. 9, 2007. But a decline of this magnitude hardly qualifies as a “bear” market, which is generally defined as a loss of at least 20%. However, this isn’t the impression you get from the nightly news or morning headlines. Fact is, stories about “Stocks Experiencing Correction” are not nearly as sexy as “Stocks Plummet.”

And in an election year, you can bet whichever party is trying to keep/gain control of the White House or Congress is going to rant and rave about how the other side has completely screwed up the economy. (Hint: you ain’t heard nothin’ yet.)

Because people tend to make stupid mistakes with their money when they get emotional, the challenge for any investor is to remain cool. But it's easier said than done. However, for a retiree it’s even more important, for the simple fact that, since you’re not bringing home a paycheck any more, you can’t “fix” a mistake by adding more money to your portfolio.

I’ve said it before: One of the most valuable things a financial adviser can do is stop you from taking an action you’ll regret later. If you haven’t worked with a professional during the process of accumulating your nest egg, you should consider finding one who can help you through the next phase. Generating an increasing stream of income that will last as long as you do is a lot tougher.

Hope this helps,
Gail

If you have a question for Gail Buckner and the Your $ Matters column, send them to: yourmoneymatters@gmail.com, along with your name and phone number.