Millions of Boomers Will Be Forced to Live With Less

Time marches on, and with every passing day, around 10,000 baby boomers hit age 65, the traditional retirement age. As a generation, the boomers are used to making waves. As they retire, though, the waves they make will likely affect them more like tsunamis, than the more pleasant type they used to catch while surfing.

On average, boomers are woefully unprepared to retire comfortably. According to a recent survey by TD Ameritrade, the typical boomer has around $275,000 saved -- and needs $475,000 more, for a total of $750,000, in order to make it through a comfortable retirement. That kind of cash is tough enough to come up with for someone with decades to plan. For a leading-edge boomer facing imminent retirement, it may very well be impossible.

How ugly can it get?
Based on the 4% rule for retirement withdrawals, a retiree with a $275,000 nest egg in a well-diversified portfolio can withdraw $11,000 each year, indexed for inflation, and likely not outlive his or her money. With the average retiree's Social Security check of $1,264.88 a month adding around another $15,179 a year, the typical boomer, retiring today, would have just over $26,000 a year to live on.

That's in the neighborhood of half of the average household income -- recently estimated to be around $51,404 per year. And, given that average earnings generally increase with experience for folks under retirement age, chances are that a $26,000 income level would be an even steeper drop than half for a boomer.

Still, even those numbers, as bleak as they are, may be wildly optimistic for boomers. For one thing, abysmally low bond yields, and the incredible volatility in the stock market over the past decade, are calling into question whether that 4% rule still works today. The current safe withdrawal rate may actually be lower than 4% -- increasing the likelihood that you could deplete your savings by withdrawing at that old presumably safe level.

On top of that, Social Security's Trust Funds are expected to be emptied within the next two decades, slashing benefits by about a quarter. Put those two ugly factors together, a very plausible scenario for many boomers may well be waking up some 20 years from now with no nest egg, a radically smaller Social Security check, and no real way to earn a living.

What can you do about it?
If the thought of waking up a broke octogenarian relying on a diminished Social Security check as your sole source of income doesn't appeal to you, you can still do something about it. If you're a leading-edge boomer without a substantial nest egg, though, this is really your absolute last chance before time gets the best of you. Here are your options if you want to avoid that fate:

Work and save longer: The longer you work, the longer your existing nest egg can compound before you tap it, the more cash you can add to it from your earnings, and the fewer number of years of retirement it needs to cover. Thanks to catch up contributions, eligible boomers age 50 or older can shelter $23,000 in their 401(k)s, and $6,500 in their IRAs in 2013.

Focus on investing efficiently: The S&P Depository Receipt (SPY 1.19%) tracks the S&P 500 index, and lets investors own a large chunk of America's economy with a mere 0.09% expense ratio. Likewise, for the fixed income side of a portfolio, the iShares Core Total US Bond Market ETF (AGG 0.21%) provides broad exposure across investment grade bonds, for a mere 0.20% expense ratio. All else being equal, the less you spend on investment fees, the faster your money will compound for you.

Be more aggressive: Instead of relying solely on bonds for income, consider owning ETFs built from companies with histories of paying and increasing their dividends. Nasdaq maintains an index called "dividend achievers" that only contains stocks with at least a 10-year record of increasing dividends. Rising dividends do a better job than static interest payments in helping you keep up with inflation. The table below shows three different ETFs that invest in companies that make up that index:

Data from Yahoo! Finance and ETF information sheets, as of April 4, 2013.

While the potential income over the long haul by investing in companies with growing dividends may be higher, it comes with risks. The biggest risk is that dividends are not guaranteed to rise, or even get paid. Companies -- including former dividend achievers -- can slash their payments, or have their payments slashed, when their operations get too rocky or their debts too heavy.

Time risk? Investment risk? Starvation risk?
If you're a leading-edge boomer who hasn't yet fully funded your retirement, you are now faced with a stark choice. Do you:

• Risk missing out on retirement by working longer to build your missing nest egg?
• Take more investing risk for the hope that the companies you own will deliver you a stronger cushion?
• Risk living out the last of your golden years with a severely diminished income from an emptied nest egg and an equally drained Social Security Trust Fund?

It may not be pretty, but given that time keeps marching on, it's the stark choice millions of boomers are now facing.