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This chapter is from the book

Get Real

People are great at deluding themselves—at telling themselves everything will work out when it won’t.

In 2004, Towers Perrin surveyed people within 10 years of retiring. Among those who had saved nothing, 58 percent not only were confident that they would have everything they needed in retirement but expected to be able to take trips and buy luxuries, too.

This delusional thinking gives new meaning to the term “American Dream.” We are a nation of optimists, but this takes it a bit too far.

So don’t fool yourself. If you don’t save, Social Security—alone—won’t do it for you, even if the system lasts instead of crumbling the way some analysts are predicting. You won’t be buying luxuries. You will be wondering how you will pay for electricity and heat your home or apartment. According to a 2006 survey of seniors done by AARP, half of retirees worry they won’t be able to pay their utility bills during the next year.

And it’s no wonder. About half of seniors now depend on Social Security to cover at least 50 percent of their living expenses. And the average senior gets $1,011 in Social Security a month.

So let’s get real. Think of your lifestyle now, and how you’d handle it if you were living on just $1,011 a month.

But let’s take this a step further. Imagine that you have saved what the majority of Americans who are 10 years away from retirement have saved: It’s no more than $88,000, according to the latest research by the Congressional Research Service. What would $88,000 give you? If you bought an annuity when you retired—an insurance policy that promises you a certain monthly income for life—you would be able to buy one that would give you about $653 a month.

So that’s perhaps $653 from your lifetime savings, and $1,011 in Social Security—or about $1,664 a month to live on.

How does that sound?

Oh, and one more thing. People often think Medicare will cover all their health needs in retirement. But that’s not true. The average retired couple has to pay about $330 a month for extra health insurance, because Medicare pays only part of what people need, according to the Medicare Payment Advisory Commission. And then there are prescription drugs. Remember, older people aren’t usually as fit as younger people.

Perhaps you’ve heard that there’s a new Medicare program that provides free drug coverage. But that’s not true either. It helps pay for drugs. Even with the new coverage, the ordinary retiree will have to spend about $790 a year for prescriptions, according to a Congressional Budget Office estimate.

So now look at a monthly income of about $1,268 after paying for medical insurance and medicine.

Could you handle it?

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