Time for a little thought experiment: Take a moment and think of the savings you will need in retirement.
Got it? Good. Now here is the hard truth: That number is likely low.
That is not a personal judgment of your standard of living, your income, your savings or your ability in math. It is just probability.
The Employee Benefit Research Institute recently put out its annual Retirement Confidence survey, a kind of national state-of-the-union about where our savings stand. What it found: 37 percent of retirees say that their overall cost estimates turned out to be low. When you separate out healthcare costs, 44 percent said they faced higher-than-expected bills.
In contrast, only 8 percent of people said they encountered lower-than-expected retirement costs.
"A lot of people assume they will spend far less in retirement than when they were working," says Craig Copeland, senior research associate with EBRI. "But in many cases, that is just not true."
This is not just a minor math error. It is a potentially catastrophic one.
If your entire retirement plan is based on one particular assumption -- how much you will be spending every month -- and that figure turns out to be way off, then you have just lit some TNT under the last quarter of your life. And by that point, it is largely too late to do anything about it.
However, if you are still in your prime working years like Gen X and younger Baby Boomers, or entering the workforce like Millennials and Gen Z, then there is still time for a course correction.
Here is what the experts advise:
1. Do the math
If you have not actually sat down and calculated what you will need every month -- granular stuff like mortgage, utilities, food and so on -- then you really have no idea what you are talking about.
In fact only 38 percent of people have even tried to do the math, according to the EBRI survey.
So put together a retirement budget. Even if those numbers have to be adjusted later, at least you are getting closer to a real picture of what daily expenses are going to look like.
"I had a client who envisioned a $30,000 annual living expense at retirement," says Rose Swanger, a planner in Knoxville, Tennessee. "But their current annual expense is over $300,000. Don't fool yourself like that."
2. Factor in inflation
In recent years we have been relatively spoiled, as beneficiaries of historically low inflation rates. The current estimated rate for 2018 is a modest 2.54 percent.
But anyone who remembers that late 1970s knows why inflation is called retirement's "silent killer." Beginning in 1979, the annual inflation rate hit 11.3 percent, 13.5 percent, and 10.3 percent -- a triple whammy enough to blow up anyone's retirement expectations.
So factor inflation into your projections because if you save a buck now, that buck will not have nearly as much purchasing power in 2040, or whatever your projected retirement date happens to be.
3. Be realistic about daily expenses
Many retirement plans employ the assumption that you will spend 60 percent or 70 percent of what you do during your working years. But is that realistic?
"I ask clients, 'Do you typically spend more money on a Tuesday or a Saturday?'" says financial planner Andrew Houte of Brookfield, Wisconsin. "They usually answer Saturday. Well, every day in retirement is a Saturday."
The costs people almost never account for are the ones they cannot necessarily predict beforehand: a car repair, a home remodel, financial help for a child, a big family trip.
Throw in some major one-time expenses -- particularly in the early years of retirement when people tend to be more active -- and suddenly your retirement outlook looks very different.
4. . Rethink medical costs
If you are a healthy 30-year-old, are you going to accurately estimate future healthcare costs? Almost certainly not -- after all, you do not even know what future health conditions you are going to develop.
That is why healthcare is the single most underestimated cost category, according to the EBRI study. Things like premiums, co-pays and deductibles can add up very quickly.
For the record, a healthy 65-year-old couple retiring this year will encounter $280,000 in medical costs through their retirement, according to Fidelity Investments1 -- over and above anything covered by Medicare.
"There is a pervasive myth that healthcare in retirement is totally free," says David Rae, a planner in West Hollywood, California. "This is 100 percent not the case."