4 signs you're in retirement denial

Portfolio and home values have tanked, but you won't see that reflected in most people's retirement plans. Here's how to tell if you need a reality check.

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 many people who are, or thought they were, near retirement.

A recent Pew Research Center survey, for example, says most middle-aged Americans are thinking about altering their retirement plans. 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.

1. 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 (.pdf file). 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 household is 63.

2. Your retirement age hasn't changed. Hello! McKinsey says its polling finds that only about 25% of consumers are thinking about postponing retirement. If you're in the other 75%, 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% 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 could rise, not fall.

3. 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 of 2007. Yet McKinsey found that the percentage of consumers expecting to finance their retirements by tapping the equity in their homes actually has risen.

Take a 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 anytime soon," he says.

4. 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% of nonretirees polled said they expect to have no debt other than a mortgage when they retire, and only about 20% expected to have some debt. But more than half the retirees in the survey said they carried debts, excluding mortgages, into retirement.

Likewise, less than a quarter of nonretirees 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.

Will Dow hit 10,000 this year?

Surprisingly strong earnings reports sparked a Dow rally of nearly 12% over the past 2 weeks. But now investors are turning their attention back to the economy.

Now that the Dow Jones Industrial Average ($INDU) has broken the psychologically important 9,000 level for the first time since January, is Dow 10,000 within sight?

Eventually yes, say experts, some of whom expect to see Dow 10,000 as early as the end of this year. But whether that benchmark is sustainable is debatable.

Less-bad-than-expected second-quarter earnings have helped propel the Dow higher, but while there may be potential for gains in the short term, any sustainable growth won't occur until larger fundamental issues -– namely, employment and consumer sentiment -- improve.

"It's the battle of the economy vs. earnings," says Doug Roberts, the chief investment strategist at ChannelCapitalResearch.com. Roberts says prospects for hitting 10,000 look pretty good over the next six months or so, as long as earnings continue to come in better than expected. But toward the end of this year or early 2010 may be "where the rubber meets the pavement."

"I'm kind of short-term bullish but longer-term bearish," says Roberts.

While second-quarter earnings season has offered enough upside surprises to make it look like the weather is starting to improve, this could just be the eye of the storm, not the end of it, says Howard Silverblatt, a senior index analyst at Standard & Poor's.

"We're getting ahead of ourselves, in terms of earnings, significantly," Silverblatt says. "The way companies are making money this quarter is cuts," he says.

But cuts can only take companies so far before sales will have to increase in order to continue the parade of good news. That means consumers need to start spending.

Investors should get a better sense of how willing consumers are to re-open their wallets over the course of the next three weeks, when retailers report same-store sales numbers and earnings.

While Silverblatt expects some retailers to offer reasonably positive outlooks, other experts question the ability of overleveraged households to drive any real economic growth, especially as unemployment continues to climb. (The Department of Labor said unemployment hit 9.5% for the month of June.)

Americans won't start spending until their incomes start rising, says Keith Hembre, chief economist for First American Funds. "Given the shock that's occurred to the household balance sheet, there's probably likely to continue to be upward pressure on savings rates," says Hembre, who expects to see constrained economic growth over the next several years.

One possible upside surprise: increased demand from consumers in emerging market economies, Hembre says.

Most experts agreed that the rally will eventually give way to a pullback. The tricky question is: How quickly will we see the other side of what some expect to be a U-shaped recovery?

With the relatively positive earnings season behind us and economic indicators still mixed, a retreat in the Dow could come quickly, says Roy Williams, CEO of Prestige Wealth Management of Pennington, N.J. "This is a healing process that we're going through," Williams says.

Kevin Mahn, managing director and chief investment officer of Hennion & Walsh Asset Management, is "cautiously optimistic" for a more sustainable recovery for the end of this year or beginning of 2010.

"Investors who are looking to take part in this recovery shouldn't just be looking at the Dow and the S&P," Mahn adds. In fact, he expects innovative small-cap firms leading the long-term recovery.

Predictions should be taken with a grain of salt. "This is absolutely an unprecedented environment, and the scope for surprises is unusually large," says Hembre.

20 ways to waste your money

Almost all of us have a few budget leaks, whether it's careless spending or tiny indulgences that add up over time. Plug them up and watch your savings grow.

Whether a newbie or seasoned budgeter, nearly everyone has spending holes -- leaks in your budget that drain money with you hardly noticing.

These little drips can add up to big bucks. Once you find the holes and plug them, you'll keep more money in your pocket. That spare cash could be the ticket to finally being able to save, invest or break your cycle of living paycheck to paycheck.

Here are 20 common ways people waste money. See if any of these sound familiar, and then look for ways to plug your own leaks.

How to waste your money

1. Buy new instead of used. Talk about a spending leak -- or, rather, gush. Cars lose most of their value in the first few years, meaning thousands of dollars down the drain. However, recent used models -- those that are less than five years old -- can be a real value because you get a car that's still in fine working order for far less than the new-car price. And you pay less in collision insurance and taxes in the bargain.

Cars aren't the only things worth buying used. Consider the savings on pre-owned books, toys, exercise equipment and furniture. (Of course, there are some things you're better off buying new, including mattresses, laptops, linens, shoes and safety equipment, such as car seats and bike helmets.)

2. Carry a credit-card balance. If you have a $1,000 balance on a card charging 18%, you blow $180 every year on interest. That's money you could certainly put to better use elsewhere. Get in the habit of paying off your balance in full each month.

3. Buy on impulse. When you buy before you think, you don't have time to shop around for the best price. Resist the urge to make an impulse purchase by giving yourself a cool-off period. Go home and sleep on the decision. If you still want to buy the item a day or so later, comparison-shop, check your budget and go for it. Oftentimes, though, you'll probably decide you don't need the item after all.

4. Pay to use an ATM. A buck or two here and there may not seem like a big deal. But if you're frequenting ATMs outside your bank's network, the surcharges can add up. Put that money back in your pocket by using ATMs in a surcharge-free network such as Allpoint or Money Pass.

5. Dine out frequently. A habit of spending $10, $20, $30 per person for dinner can be a huge drain on your wallet. Throw in a $6 sandwich for lunch and a $4 latte in the morning, and you've got quite a leak. Learn to cook, pack your lunch and brew your coffee at home -- you could save a couple hundred bucks each month.

6. Let your money wallow. If you are stashing your savings in your checking account or a traditional bank account, you are wasting money. You could put it in a high-interest online savings account and get paid to save. You can even get an interest-bearing checking account through such reputable companies as EverBank, Charles Schwab, E*Trade and ING Direct.

7. Pay an upfront fee for a mutual fund. Selecting no-load funds can save you more than the sales charges. Of course, no matter how well a fund has done in the past, you can't be sure how it will perform in the future. But if you pay a load, you'll begin the performance derby in the hole. See the Kiplinger 25 for some favorite no-load funds.

8. Pay too much in taxes on investments. Are you investing in a tax-sheltered 401k or Roth IRA? If you're not maxing out those accounts before you invest in a taxable account, you're spending too much.

9. Buy brand name instead of generic. From groceries to clothing to prescription drugs, you could save money by choosing the off-brand over the fancy label. And in many cases, you won't sacrifice quality. Clever advertising and fancy packaging don't make brand-name products better than lesser-known brands.

10. Waste electricity. Of the total energy used to run home electronics, 40% is consumed when the appliances are turned off. Appliances with a clock or that operate by remote are typical culprits. The obvious way to pull the plug on your energy vampires is to do just that -- pull the plug. Or buy a device to do it for you, such as a Smart Power Strip ($31 to $44 at SmartHomeUSA.com), which will stop drawing electricity when the gadgets are turned off and pay for itself within a few months.

11. Pay banking fees. Overdraw your checking account and you'll pay $20 to $30 a pop, so it pays to keep tabs on your balance. Plus, if you’re still paying for a checking account, free deals abound -- but make sure they're really free. For instance, will the bank charge a fee if your balance drops below a certain level or if you download your info into a personal-finance software program? That's not free.

12. Buy things you don't use. This sounds like a no-brainer to avoid, but how many times have you seen something on sale and thought you couldn't pass it up? Even if something is 50% off, you're spending too much if you don't use it. Couponing, for instance, can be a great way to save on your grocery bills. But if you buy things you wouldn't have otherwise purchased just because you have a coupon, you're wasting money. The same goes for buying in bulk. A bargain is no bargain if it sits unused on your shelf or gets thrown away.

13. Own an extra car. OK, so a car is a necessity for most people. But face it -- cars are a huge drain, from loan payments to insurance fees to gas and maintenance costs. Own more than one car and those expenses multiply. Ask yourself if that second or third car is really necessary. Are you holding on to an old car for sentimental reasons? Can you or your spouse carpool, take public transportation or bike to work?

14. Ignore your local dollar store. Shopping at the dollar store can be hit-and-miss, but it's not all kitsch or junk. If you know what to buy, you can find some real bargains. You can may be able to score deals on cleaning supplies, small kitchen tools, shampoos and soaps, holiday decorations, greeting cards, gift wrap and balloon bouquets. See "Dollar store deals and duds."

15. Keep unhealthy habits. Smoking not only damages your health, it burns up your cash. A pack-a-day habit at $6 a pack costs $2,190 a year. Junk-food or tanning-bed habits can be costly as well, even before the money you'll spend on medical bills down the road.

16. Be complacent about insurance. Your bill arrives and you pay it without a second thought. When was the last time you shopped around to determine whether you're getting the best deal? Rates vary widely from insurer to insurer and year to year. Rechecking prices on auto, home or renters insurance might save you hundreds of dollars.

It also pays to re-evaluate your insurance needs. For instance, upping your out-of-pocket deductible to $1,000 from can save you 15% or more on your car insurance. Consider using the same insurer for your home and auto insurance -- you could snag up to 15% off for a multiple-line policy. And make sure you're not paying for insurance you don't need. For instance, you need life insurance only if someone is financially dependent upon you (such as a child).

17. Give Uncle Sam an interest-free loan. If you get a tax refund each April, you let the government take too much money in taxes from your paycheck all year long. Put that money in your pocket -- and put it to work for you -- by adjusting your tax withholding. With a little discipline, you can use that extra cash each month to get started saving or pay down debt (or make ends meet to avoid going into debt in the first place). You can file a new Form W-4 (.pdf file) with your employer at any time. For help, see "Why I hate income-tax refunds."

18. Pay for something you can get for free. Dust off your library card and check out books, music and movies for free (or dirt cheap). Don't pay to receive your credit report when you're allowed to get it at no charge by law. Take advantage of kids-eat-free promotions. And dial 1-800-FREE-411 for free directory assistance. (See our list for more fabulous freebies.)

19. Don't use a flexible-spending account. Your employer may allow you to set aside pretax dollars for medical costs not covered by insurance. You can use the money for expenses such as therapy, contact lenses, insurance co-payments and over-the-counter drugs. The IRS provides a full list of qualified expenses here (.pdf file). You may be able to do the same for child-care costs.

You don't want to put away too much, because if you don't use all the money in your account by the end of the plan year, you lose it.

20. Pay for unnecessary services. How many cable channels can a person watch? Do you really need all those extra features for your cell phone? Are you getting your money's worth out of that gym membership? Are you taking full advantage of your subscriptions (such as Netflix, TiVo or magazines)? Take a look at what you pay for and what your family actually uses. Trim accordingly.