Opinion: Retirement is going to cost a lot more than you think — here’s what to do

Be afraid. Be very afraid.

At least that’s what a new study showing how much you’ll need to be OK in retirement says. You thought living off 70% or 80% of your preretirement salary would be enough? Think again.

Try 130%.

That’s right. You may need to generate a more—a lot more—income in retirement than you think.

Here’s the premise. When you’re no longer working 40 hours a week (or more if you’re a typically overworked wretch), that’s 40 hours a week when, all of a sudden, you’re available to spend money. Everyday’s like Saturday. On top of that, a lot of things your employer used to pay for—like coffee, a laptop and phone, maybe a subsidized gym membership, tuition reimbursement—that’s now on you.

One time I had a job that took me from New York to Los Angeles each month. I would often stick around L.A. a few extra days, which I paid for, but the round trip airfare—that was on the boss. Think about all the little ways that your employer subsidizes your life. It can add up. But when you retire, it all goes away.

Read: Retirement isn’t a permanent vacation. Don’t spend your free time spending

The study is based on a collaboration between fintech company MoneyComb and the Center for Advanced Hindsight at Duke University. The Center’s Dan Ariely and Aline Holzwarth, writing in our sister publication The Wall Street Journal (MarketWatch and The Wall Street Journal are both owned by News Corp. NWS, +0.76% ), say that a new way to think about retirement spending is to consider seven spending categories: eating out, digital services, recharge, travel, entertainment and shopping, and basic needs.

Unlike fixed expenses like housing and utilities, which will generally stay about the same (if you stay in place), spending in these seven categories can vary widely. Maybe you’re a foodie and want to eat out three nights a week. Maybe you’ll give in and get that sports car you’ve always dreamed of, which will not only cost you a pretty penny but jack up your insurance and maintenance tab. What if you plan to take several cruises each year? What if you have three daughters? That’s three weddings you’re probably on the hook for. In other words, retirees are like snowflakes: No two are alike.

Thus, Ariely and Holzwarth write, “Now that we know how misguided the 70% figure is, here’s the hard question: How can each of us figure out more precisely the kind of life we’ll want—and what it will cost?” They recommend that you think, really think, about how much you’re likely to spend in each of those categories.

And as you consider these things, don’t ignore inflation, which eats away at purchasing power as sure as the sun sets in the West. Fidelity Investments, for example, said earlier this year that a 65-year-old couple retiring this year will need $280,000 to cover health care and medical expenses throughout retirement. That’s up 2% from 2017 and 75%—or an extra $120,000—from as recently as 2002. At that rate, a couple retiring in 2033 would need $490,000—just for health care. Where’s that money going to come from?

The year 2033, by the way, is also the year when the Social Security Trustees say your monthly check from Uncle Sam will be cut 23%, based on current projections. So you’re going to face a double squeeze: bigger bills for things than you think, with less money coming in to cover it. That’s why I think Ariely and Holzwarth’s thesis has merit.

Read: Why the latest news about cuts to Social Security and Medicare are reason to worry

Some of the most experienced financial advisers in the nation concur. “We do not believe the 80% rule,” says Donald Chomas, a portfolio manager and wealth adviser for UBS Securities—who has been advising retired clients for nearly three decades. “In our experience, clients often spend up to 50% more in their early years of retirement when compared with the preretirement spending estimate.” He adds “Nearly all of our retirees seem to spend at least a little more than they predict and almost none spend less than they predict during the first several years of retirement.”

How can retirees generate realistic cash flow, then—without taking on excessive risk? Since retirements can last two or three decades, Chomas thinks retirees must still be exposed to assets with the potential of growing beyond the rate of inflation. “We rarely see client portfolios moving to less than 50% growth orientation even once retired,” he says.

An overall approach could be to focus on that 20 to 30 year time frame, while also keeping sufficient assets in a separate bucket to cover short or near-term needs. This shorter time frame implies lower-risk and liquidity. But that longer-term bucket “should continue to be exposed to higher potential for growth and therefore higher volatility investments.”

And of course, the need for a lot more money in retirement suggests—sorry—that you may have to defer that retirement in the first place.

“If we can keep a client working and if we can get them to continue contributions to retirement plans until age 70, we have likely helped them to avoid the major pitfalls,” Chomas says.