Preparing for Retirement

Experts give advice on preparing financially and emotionally for the retirement years.

Medically Reviewed by Brunilda Nazario, MD on November 11, 2009
8 min read

For years, many Americans have looked forward to their retirement, when they can stop working and relax. Instead of respite, however, many of today's retirees are starting to find their golden years fraught with financial difficulties and emotional woes.

Today's retirees can expect to be considerably more on their own than their parent's generation was, says Clare Hushbeck, an economist for AARP.

"For people near their retirement, in their late 50s and 60s, it's probably not such a radical change from what their parents had," Hushbeck explains. "The younger boomers and the people behind them face a radically different sort of environment."

After years of pumping money into the U.S. economy, baby boomers are beginning to leave the workplace and to use the same social and health benefits awarded their predecessors. Yet expected to support the boomers is a smaller labor force. This has analysts worried about the solvency of services such as Social Security, Medicare, and Medicaid, especially with people living longer than ever before.

The expanded life span also has people worried about being able to save enough money for retirement.

"The biggest challenge financially is health care costs," says Dan Blazer, MD, PhD, MPH, president of the American Association for Geriatric Psychiatry. He says the unknowns -- the number of years a person will live, and the quality of his or her health -- make planning for expenses more difficult.

For instance, some people fail to account for extensive stays in nursing homes, a cost that is not covered by Medicare.

To improve your financial portfolio, the experts advise the following actions:

  • Consult with a financial planner. To get unbiased advice, pay a flat fee for a visit, recommends Jack Vanderhei, research director of the fellows program for the Employee Benefit Research Institute (EBRI). In free financial planning sessions, the consultants have the burden of trying to sell you something.
  • Do a self-audit of finances every year. Starting at around age 30, Hushbeck says it's a good idea to take a few hours every year to assess your financial situation. Think of where you are financially, where you want to be, and how much you expect to have and spend during retirement. This may sound like an unpleasant task, in the category of "eat your spinach," says Hushbeck, but it's a worthy action that can put you on the road to financial security.
  • Take advantage of trusted resources. In addition to staying abreast of current events regarding Social Security, Medicare, and Medicaid, read informational brochures published by government and nonprofit agencies. Educate yourself at retirement workshops sponsored by your employer, unions, credit unions, churches, nonprofit groups, or government organizations. Also take advantage of tools such as retirement calculators that can be found online.
  • Think positive. Your attitude can help determine your path in life, including your financial situation, says Robert Hotes, PhD, a fellow of the Association for Psychological Science (APS), noting that even the stock market is vulnerable to the outlook of investors. "Take a look at the assumptions you make and what you tell yourself," he explains. For example, if it turns out your pension and Social Security benefits will not cover your retirement, think of taking on a part-time job in retail as an opportunity to fulfill a long-held desire to pursue a career in sales.

To complicate retirement planning, traditional pension plans that once helped fill retirement reserves are now on the decline. More companies used to offer defined benefit plans, which would give workers a certain percentage of their preretirement income upon retirement, depending on their salary and length of service.

In the 1980s, firms began to turn to defined contribution plans, which depend upon employee and employer contributions, and the health of the stock market. Plans such as 401(k), 403(b), and profit sharing fall in this category.

"The investment risk used to be borne by the employer in the defined benefit plan. It's now being borne by the employee in the defined contribution plan," says Vanderhei, who is also a professor of risk, insurance and health care management at Temple University in Philadelphia.

"Before, if an employer promised you $50,000 a year for the rest of your life, they'd give you that $50,000 regardless of what happened to the stock market. Now, if the stock market basically tanks, you're going to have a harder time having sufficient retirement income than had you had a defined benefit plan," adds Vanderhei.

Employees with defined contribution plans do have more control over their investment portfolio, but experts like Hushbeck worry that many average workers do not have the financial savvy or the comfort level to make investment decisions.

"Many employees are paralyzed by the choices that face them," she says. "Everything that I see, hear, and read about happening on [Capitol] Hill suggests that the system is becoming ever more complicated, as there are more and more types of accounts being created or proposed."

Many workers, particularly the young and the poor, are failing to sign up in defined contribution plans, and are thus missing out on the opportunity to save for retirement, says Hushbeck.

To set up a successful retirement plan, the experts recommend the following:

  • Do the research. Find out what kind of plan your employer offers. If you are self-employed or if your employer does not offer a satisfactory retirement plan, check out options at the bank, or visit with a financial planner. Be sure to ask about fees that may be involved with setting up new retirement plans.
  • Join an investment club. In addition to educating yourself with retirement seminars and calculators and staying abreast of current events, it may help to make investing a community affair. "A lot of people don't get really serious about [retirement plans] unless they make it social and fun." says Hushbeck. "Get together once a month, or once every three months to share tips.
  • Trust your instincts. You have the right as a mature person to make your own decisions and judgments, says Hotes, urging people to avoid thinking of themselves as powerless. Think of your options, and if it helps, turn to a trusted friend or financial advisor for support. Also use vigilance in trusting people with your financial and investment portfolio in much the same way you teach kids to be wary of predators on the street.
  • Manage your resources wisely. As with the old saying, "Don't put your eggs in one basket," Robert Willis, PhD, professor of economics at the University of Michigan advises against putting all of your wealth in one company's stock. At the same time, he doesn't recommend hiding your money in a mattress, as the funds will not have a chance to grow.

In planning for retirement, assessing your psychological portfolio is just as important as examining your financial one, says Nancy K. Schlossberg, EdD, author of Retire Smart, Retire Happy: Finding Your True Path in Life, published by the American Psychological Association (APA).

Schlossberg says there are three basic areas of change at retirement:

  1. Change in identity. When people retire, they may have to alter how they define or view themselves. For example, instead of saying I work at the World Bank," a person will need to come up with something else. Some people have a hard time filling in the blank. People in positions of power and authority or those who are used to traveling a lot for work may have this experience.
  2. Change in relationships. Your interactions with people at work, the community, and at home will likely shift. Some workers who may have enjoyed talking at the water cooler will lose that same social outlet upon retirement. At the same time, home life may change with spouses or other family members having to adjust to the extra time together. Turf issues may surface. If both husband and wife retire at the same time, for example, issues may arise over who gets to use the telephone, computer, or TV. Or retirees and their adult children may have different expectations regarding family time or baby-sitting of grandchildren.
  3. Change in purpose. A person's mission in life alters at retirement. He is likely no longer expected to go to the office, construction site, or field on the same schedule.

To better cope with identity, relationship, and purpose changes at retirement, experts have the following advice:

  • Retire to something. Prior to retirement, think about what you would like your identity, relationships, and purpose to be. Blazer says people who are most happy with retirement tend to remain active. Some retirees have found satisfaction in traveling, playing golf, volunteering, serving as a consultant, or in taking on a part-time job.
  • Practice being retired. Begin to make acquaintances outside of work and take up activities you expect to have after retirement. Take a few vacation days off work to see what it's like to be at home, suggests Blazer. If you're thinking of becoming a world traveler, take a few international trips beginning five to 10 years before retirement. It is, in fact, not a bad idea to start thinking of your identity, relationship, and purpose changes as early as a decade before retirement.
  • Initiate an expectations exchange. Don't wait until conflicts arise to talk about expectations with spouses, children, grandchildren, parents, and friends. If there are disagreements over how often you'll baby-sit grandkids, for example, try to negotiate an agreeable solution. If a solution cannot be reached, try working with a professional, which may be a mental health expert.
  • Transfer your skills. Look at retirement as an opportunity to start a new chapter in your life. This may mean continuing what you have been doing on a different scale, or doing something completely different. For people who were in positions of authority before retirement or for those who traveled a lot, the adjustment may be more challenging. In this case, try taking on other activities that use your leadership or travel skills.

Retirement planning can be a daunting, frustrating experience for many people, which is why some people put it off. Yet with procrastination comes lost opportunity for better understanding, to boost retirement funds, and to ward off conflicts. Those who are successful find much more than financial benefits.

"People who survive and who thrive in retirement are those who are flexible, and those who know that they are more than what they do," says Hotes.