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Your Finances: The reality of retirement

When people retire, they typically haven't saved 25

When people retire, they typically haven't saved 25 times their annual spending, as experts often recommend. Credit: Bloomberg News

When people retire, they typically haven't saved 25 times their annual spending, as experts often recommend.

Nor do they switch from stocks to bonds on the day they retire, which incidentally is probably before they reach the Social Security Administration's "full retirement age" of 66.

And they don't carefully calculate their monthly spending plans based on their Excel spreadsheets (unless they are engineers).

Workers should plan and prepare for retirement. But they're more likely to succeed if they plan for what actually lies ahead. Here are a few things we know to be true about retirement now.

Reality: You'll spend less than you think. But only after you spend more than you think.

Experts say you should plan on spending 80 percent to 100 percent of the amount you spend in your final years of work. But most people spend a lot in their first year or two of retirement ding things like taking long-deferred trips, fixing up the house, investing in hobbies.

Then over time retiree spending drops substantially. Households headed by people over the age of 75 spend just 72 percent of what households headed by people between the ages of 65 and 74 do, and they spend just 63 percent of what households headed by people 55 to 64 do, according to an analysis of U.S. Department of Labor figures by J.P. Morgan Asset Management. Household spending actually peaks in households led by 48-year-olds; their spending is almost cut in half by the time they are over 75.

Reality: You won't work until you are 70. Now, workers are regularly told that they will benefit greatly if they work until they are 70 and hold off until that age before collecting Social Security benefits. That's not very realistic.

In fact, fewer than 2 percent of retirees make it to 70 before they start drawing on Social Security, J.P. Morgan found. The average retirement age is 61, according to a recent Gallup survey.

Reality: Your spending won't be stable, and you may not want your income to be. Retirees spend much of their money in chunks. They buy a car one year, reach into their savings to help grandchildren go to college. And sometimes they have lean years, where they stay home and concentrate on their gardens and reading.

That means that a proper retirement nest egg allows for that variability -- it keeps some money liquid and doesn't tie up too much in annuity products that pay out the same amount of money month in and month out.

Reality: You'll have fun. It doesn't take huge amounts of money to build a successful retirement. The best things in life are free.

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