This 1 assumption can completely ruin your pension – Motley Fool

Many seniors look forward to retirement, especially those who break up their careers, feel overworked and overwhelmed. But while the freedom associated with retirement is certainly something positive to foresee, many Americans entering retirement are thrilled with that prospect, coming up in cash and being miserable pretty early. And the reason often boils down to a problematic assumption about their golden years.

You Need More Pension Income Than You Think

Many people assume their cost of living will fall dramatically when they stop working. But in reality, many elderly people only see a modest decline in spending. Some, however, give up more in retirement than they did during their working years, and when we really stop thinking about our bills, it makes sense.

Image source: Getty Images.

The only expenses that are likely to disappear in retirement are your commuting and job-related costs, and the pension plan contribution. The rest of your expenses are highly likely to remain the same, or even go up to a certain extent. After all, you need food in retirees just as you did when you worked. You also need housing, transportation, clothing, tools and other such necessities that are not a function of having a job.

And if you think the housing costs will slow down a bunch if you pay your home loan earlier to retire, think again. As the homes grow older, they tend to demand more maintenance, and as people get older, the maintenance itself is challenging. Throw in the fact that property taxes tend to rise over time (even in times when housing values ​​fall), and it may well be that you actually remove mortgage payments in time for retirement, just to have it replaced with other housing expenses.

Then it is health care and leisure time to consider – two expenses that often go up in pension. The former often rises because health problems tend to creep up and escalate as people get older, and while Medicare can help retrieve the health care category, there are a number of key services that the program won't cover. Also, Medicare is by no means free – between premium costs, deductibles, and copays, even covered services can cost you a small fortune.

Similarly, being retired means having more free time on your hands, and occupying that time is suitable to cost money. As such, you can easily spend more on leisure as a senior than you did as a working adult.

Increase Your Savings While You Can

Hopefully, you are at least a little convinced that retirement can end up being a more expensive prospect than you assumed it would be. The good news is that if you solve your savings game, you have a shot at collecting enough nesting money to cover the above-mentioned senior costs, and then some.

Let's assume that you have a good 30 years until you are retired and that you are able to invest the savings in a way that generates an average annual 7% return over that period. (This should be more than possible with a stock-bearing portfolio.) Here you see what your end-user's egg balance may look like from your monthly contributions:

Data source: Calculations by author.

You have to admit that they are some pretty impressive numbers, especially when you work your way down the table. Therefore, do not stress about the fact that retirement will cost a lot of money. Rather accept it and do your best to save properly. If you save on savings under the assumption that you will spend much less as a senior, you will probably be very sorry for that fact.