How much money do I need to retire? It's a question that has plagued investors and kept financial advisors employed for decades. It has spawned books, magazine articles, newspaper columns, television commentaries, radio shows and endless speculation among would-be retirees. Of course, the one thing that everybody knows is that you will spend less during retirement than you spent during your working years. Right? Maybe not.

KIPPERS and Expensive Mortgages
Historically, the argument that investors needed less money during retirement than during their working years had some merit. Empty nesters no longer had children to support and mortgages were finally paid off. With most lenders recommending that the four components of a mortgage - principal, interest, taxes and insurance (collectively known as PITI) - not exceed 28% of one's gross income, and many borrowers exceeding 30% or even 40%, simply paying off the mortgage could dramatically reduce a retiree's monthly cash outlay.

But times have changed. An increasing number of adult children are not moving out of their parents' homes or, in many cases, they are moving back home - sometimes with their own families in tow and expectations for a handout from mom and dad. This phenomenon has given rise to the term "KIPPERS," which is an acronym for "kids in parents' pockets eroding retirement savings". A 2005 survey conducted by the BBC suggests that 25% of households in the United Kingdom have adult children residing with parents. In Japan, children who never leave home are called "parasite singles." In Italy, they are called "mamma's boys," and in the U.S. they are often called "boomerangers." Call them what you will, these adult children are an added expense for mom and dad.

Also, an increasing number of retirees are still paying mortgages. In fact, more Americans are carrying mortgages into retirement than ever before. A USA Today analysis of the U.S. census data from 2000 showed that 28.3% of homeowners age 65 or older were still making mortgage payments. That's up from 20.7% in 1990 and 18.9% in 1980. Data published by the Federal Reserve in early 2006 shows that mortgage debt grew by 75% over the past five years, outpacing the 71% growth in the value of household real estate. The average outstanding mortgage debt on a primary residence owned by a retiree was $31,000 - a significant amount of debt for someone living on a limited income.

Retirees are also tapping into home equity to generate spending money. As a result, debt is rising. According to the Federal Reserve's 2004 Survey of Consumer Finances, 40% of households headed by someone aged 75 or older had debt in 2004, up from 29% in 2001. Not only are many people still paying off the mortgages on their primary residences, but some of them have purchased vacation homes, taking on second mortgages. The U.S. Census Bureau cited 6.6 million vacation homes in the U.S. in 2003. The typical buyer, according to the National Association of Realtors, is aged 55 or older.

Retirement Lifestyle
When you spend all of your days working for a living, you might picture retirement as a time to kick back in your rocking chair and relax, but with rising life expectancies, an active lifestyle is not out of the question. While it is unlikely that you are going to suddenly take up bungee jumping or downhill skiing at age 65, you will likely be able to spend more time doing the things that you've always wanted to do, such as traveling. Of course, heading off to Hawaii or making that cross-country trip by a Winnebago isn't exactly an inexpensive way to spend your newfound free time.

Longevity also has its costs, with healthcare accounting for 20% of the average retiree's income according to the Health and Retirement Study, a study sponsored by the National Institute on Aging. That's a significant expense that most people don't even think about during their working years. Like everything else, healthcare costs are only expected to rise over time.

What Does It all Add up to?
Simply put, your first year in retirement (and maybe the other years too) could cost at least as much, if not more, than the amount you earned during your last year in the workforce. A retirement consumption survey, conducted by the TIAA-CREF Institute and published in 2005, indicated that 20% of retirees spent more during retirement than they did during their working years. Only 30% of retirees spent less money while retired than while working. If you really put some thought into the issue, it makes a lot of sense that retirement would cost more than your working years. After all, why would you want to work most of your life only to live a more frugal lifestyle just when your leisure time reaches an all-time high?

Conclusion
If you want to set yourself up for a comfortable retirement, you need to think carefully about the lifestyle that you want to have in the future. Track your current expenditures to determine how much it costs to maintain your current lifestyle. Use those numbers to estimate the cost of retirement, including expenses that do not already exist in your life.

Once you've figured out the lifestyle that you want and the amount of money that lifestyle will require, the next stage is to take a close look at your finances. The big challenge here is to determine how big your nest egg will need to be to turn your dreams into reality.

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