Four Signs You're in Retirement Denial

Many people are failing to accept that the recession and lost wealth are retirement game-changers.

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Optimism is good; denial isn't. When it comes to retirement plans, the evidence is overwhelming: the recession will delay retirements for millions and reduce the standard of living of even more people who are, or were, getting near retirement. A recent Pew Research Center survey, for example, says most middle-aged Americans are thinking about delaying their retirements and altering plans in other ways. Yet despite the short-term adjustments that consumers are making -- looking for bargains, saving more -- many continue to hold expectations about retirement that experts say are simply no longer realistic. Here are four signs that you may be in denial about how the Wall Street and housing meltdowns have changed your retirement prospects.

[See also How to Get Your Finances Back on Track in 6 Steps.] Your Retirement Plans Haven't Changed. This is the big one, and most people are kidding themselves if this is their view. McKinsey & Co. has developed what it calls a retirement readiness index. It measures changes in the values of retirement assets -- Social Security, pensions and financial holdings -- to determine the financial preparedness of households for retirement. An index value of 100 means a household can maintain its current standard of living in retirement. A reading below 80, McKinsey says, "calls for large reductions in spending on basic needs, such as housing, food, and health care." The current index reading for a typical houshold is 63.

Your Retirement Age Hasn't Changed. Hello! McKinsey says its polling finds that only about 25 percent of consumers are thinking about postponing retirement. If you're in the other 75 percent, stop and think about what would happen to your standard of living in retirement. You don't need a retirement readiness index. First, add up Social Security and any pensions. Next, total up any retirement accounts and other financial assets and assume conservatively that 4 percent of that amount is available to you each year for spending needs. How does the total compare with what you're spending now? Some financial planners say you can live for less in retirement but health-care expenses likely will be steeper, and if you want to travel and enjoy leisure-time activities, your spending needs could rise, not fall.

Your Home is Still Your Castle. Housing values fell sharply in most markets and many experts say it easily could take a decade for them to return to the inflation-adjusted values they enjoyed in 2007. Yet, McKinsey found, the percentage of consumers expecting to finance their retirements by tapping the equity in their homes actually has risen! Take a real serious look at the likely equity you'll have in your home when you reach your planned retirement age. Dean Baker, co-director of the Center for Economic and Policy Research, says those trillions in lost housing values will be a drag on the economy and retirements for years. "I remain a pessimist on the prospect for a recovery any time soon," he says.

[See also Seniors Stay Put in Tough Times.] You Expect to be Debt Free in Retirement. While consumers generally have held steady on debt levels in the past year, debt among baby boomers actually has been rising, according to a survey from Securian Financial. More than 60 percent of non-retirees polled said they expect to have no non-mortgage debt when they retire and only about 20 percent expected to have some debt. But more than half the retirees in the survey said they carried non-mortgage debts into retirement. Likewise, less than a quarter of non-retirees believe they will still owe money on a mortgage when they retire, but twice as many people who already have retired said they were still making mortgage payments when they stopped working.