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Millions of Boomers Will Be Forced to Live With Less

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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 (NYSEMKT: SPY  ) 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 (NYSEMKT: AGG  ) 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:

ETF

Dividend Acheivers Index Aspect

Current Yield 

Expense Ratio 

Vanguard Dividend Appreciation (NYSEMKT: VIG  )

Select index -- those with higher dividend growth potential 

2.21%

0.13%

PowerShares Dividend Achievers (NYSEMKT: PFM  )

Broad index -- all companies that qualify to be achievers 

2.19%

0.60%

PowerShares High Yield Dividend Achievers (NYSEMKT: PEY  )

50 higher yielding members of the dividend achievers index 

4.04%

0.60%

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.

For more retirement-focused insights
Making the right financial decisions today makes a world of difference in your golden years, but with most people chronically under-saving for retirement, it's clear not enough is being done. Don't make the same mistakes as the masses. Learn about The Shocking Can't-Miss Truth about Your Retirement. It won't cost you a thing, but don't wait, because your free report won't be available forever.


Read/Post Comments (21) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 05, 2013, at 9:10 PM, luckyagain wrote:

    There is a fourth option that will come about in a few years. Not far from Miami is a large island that might accept the poor retirees because they will finally bring badly needed funds to it. That island is Cuba. Once the Castro brothers depart this world and the US finally gets over its policy of treating Cuba like North Korea, it will become a place where ordinary Americans will be welcome along with their retirement checks. Not many people remember but some people retired to Poland when it was a Communist country because it was affordable. Cuba will have the same affordability plus it is near enough to the US for quick trips home.

    Will everyone do it? Nope, but enough people will do it rather than stay in the US and essentially starve. Americans are already retiring to places like Panama and Costa Rica.

  • Report this Comment On April 05, 2013, at 9:44 PM, TheDuudeAbides wrote:

    It starts with figuring out how much money you spend every month. Not everyone necessarilly will have that difficult a time living on $2,000 a month. Some will some won't.

    The point the article makes though is very apt.

    Sit down and figure it out right now.

    How much do you spend?

  • Report this Comment On April 05, 2013, at 10:22 PM, Pillard wrote:

    They voted against their own economic interests for over 30 years, what do they expect.

  • Report this Comment On April 05, 2013, at 11:10 PM, rawsteel wrote:

    Another option-

    Move to the following countries:

    Thailand and Philippines.

    Cost of living very low.

  • Report this Comment On April 05, 2013, at 11:28 PM, eagledriver1 wrote:

    With local taxes increasing, inflation and the $60 hit per paycheck deduction from the 'NO Tax increase' in January, I am already scrapping. It is not possible to increase my 401K deduction (4%)

    with 65K at 50, I will never make it to the 275K average.

  • Report this Comment On April 05, 2013, at 11:32 PM, bugmenot wrote:

    The AARP supported Obama. Why? Obama has destroyed health care and retirement funds! Obama has destroyed your 401k with massive taxes! The AARP gave us Obama and now we are screwed!

  • Report this Comment On April 05, 2013, at 11:42 PM, abandyyang12 wrote:

    why would you compare individual $26k to average household income? $26k sounds pretty good for an individual if average household income is $51k, it doesn't sound "bleak".

  • Report this Comment On April 05, 2013, at 11:50 PM, Skatsbo wrote:

    There are no social security trust funds. It has been pay as you go with current workers supporting retirees from inception. Hard to believe I am reading this misinformation in an article like this.

    Pillard says they voted against their own self interest - meaning they should have been voting for people who would increase transfer payments from younger workers to retirees? How incredibly selfish and of course unsustainable.

  • Report this Comment On April 06, 2013, at 12:06 AM, CynMc wrote:

    Seriously. 5 years ago, our retirement funds were trashed, a goodly portion of us found ourselves unemployed mostly because we were experienced workers who had the gaul to get grey hair and wrinkles and work for more than $10 per hour. We lived on principal until we found other jobs or ran out of money, at which point we moved in with our kids. Oh good, got a new job? Start over on the retirement fund making a whole lot less and with fewer benefits and good luck with that health insurance thing until the Affordable Care Act kicks in. Living a long life will be a curse on us.

  • Report this Comment On April 06, 2013, at 4:55 AM, spankleelee wrote:

    The government should have kept their grubby paws out of our BENEFIT that we paid into. We are continually being punished while companies continue to get the handouts via contracts. The government has outsourced almost everything they can with plans to expand with more outsourcing. WHY? I might understand it if the companies stayed here and hired people. But it seems as if more are laying off. I am in Texas and see layoffs happening. I just can't understand it all. And here in Texas, we pay to build new buildings for these companies and still I see layoffs. Where are all these jobs that I keep hearing about? you know....the ones that they claim that there aren't enough skilled workers.... at the same time they make it tougher to pay the rising tuitions. Whatever happened to on the job training? This agenda of making it harder to go to college, (unless your rich) and turn around and complain because there's no one with skills...hmmmm.......whatever

  • Report this Comment On April 06, 2013, at 6:40 AM, iosax wrote:

    i have a simple question: workers today are producing 100 times more goods 100 times cheaper than 80 years ago (when ss was created). Why do we have a problem paying ss benefits today? Might be the 6 trillion we spent in Iraq? Or maybe trillions spent on various bailouts under various administrations?

  • Report this Comment On April 06, 2013, at 8:30 AM, Ausmc1967v wrote:

    The individual playing by the rules over all these years to received social security has been a sucker. We the people can not combat the stealing of the Federal Government, and Organized Crime being the Stock Market. The Govt. nor the Market can exists without the peoples money.

  • Report this Comment On April 06, 2013, at 9:46 AM, YUKONCAPO wrote:

    I live how the author, like most media spins the facts. Typical household income is stated at: $51,404. Typically, two people make up a household at retirement/ pre-retirement. So as the article says, a typical boomer will get just over $15,000 in social security. $15,000 x 2 is $30,000. Now if two people each have $275,000 and withdrawal the four percent each that will add another $22,000. Add up the two numbers and you get $52,000.

    Now lets whine and say I can not save. Get a second job, part time and invest that money. Cut back on something, soda for example. Take $1.00 a day from that soda and invest it aggressively, after 40 years you will probably have $200,000. Now invest $7.00 a day aggressively, over 35 years, and you will end up with well over a million dollars.

    Quite smoking, drinking booze, eating out. Shut off the data plan on the cell, cut the cable, don't buy a new car repair the old one, and investing is easy!

  • Report this Comment On April 06, 2013, at 10:27 AM, yardomd wrote:

    Super topic.

    Saving and investing is easy, with a little discipline and wisdom.

    This is what can save America and the World. Will it happen? You decide.

  • Report this Comment On April 06, 2013, at 11:19 AM, gergames wrote:

    The $32 trillion they recently found stored in tax free shelters by the World's rich... would go a long way for millions of retirerees World wide.

  • Report this Comment On April 06, 2013, at 12:30 PM, AllenElliott wrote:

    Thanks to our representatives for adding so much pork to every bill.

  • Report this Comment On April 06, 2013, at 12:50 PM, calbayogtom wrote:

    what about all of those who don't have a job? I think we are forgetting that the little man or the little worker guy don't exist anymore.... When your so big you can only hope that you can be bigger.... thus..... put the little guy in your inactive file. I see your solutions here are only for that upper class of people.... better find some solutions for the ones at the bottom who keep it running. Anyway.... high tech is replaceing the simple tech....and its going to ruin everything that was ever good if we let it. Ok.... plan your future....think of yourself.... wishing you the best.

  • Report this Comment On April 06, 2013, at 1:41 PM, Pseudonymity wrote:

    eagledriver1 wrote:

    "With local taxes increasing, inflation and the $60 hit per paycheck deduction from the 'NO Tax increase' in January, I am already scrapping. It is not possible to increase my 401K deduction (4%)

    with 65K at 50, I will never make it to the 275K average."

    --------------------------------------------------------------------

    Eagledriver1, don't give up just yet. Almost everyone is able to save an extra 3% by eliminating (or reducing) certain discretionary expenses. For example, cable TV, wireless data plans, dining out, etc.

    By increasing your 401K payroll deduction from the current 4% to 7% you have a very good chance of reaching "the $275K average" at age 65. (And remember, it's not an extra 3% of your take-home pay, it's an extra 3% of your gross pay.) Assuming an annual inflation rate of 2.5%, you will actually need $398,282 in 15 years to equal $275K in today's dollars.

    The stock market's average annual return from 1928 is 9.6%. With a 7% 401K contribution and a conservative 6% average annual return, let's assume the $65K you've already saved will compound at an annual rate of 13% (7% plus 6%) for the next 15 years. When you're 65 you'll have an account worth $406,527!!!

    Remember, the sacrifices you make today for that extra 3% 401K contribution will really pay off down the road. Hope this makes you feel more hopeful of having a secure retirement. I wish you (and all those trying to scrape-by in this economy) all the best...

  • Report this Comment On April 06, 2013, at 2:44 PM, gracie251 wrote:

    All who have voted Obama back in for a second term will live to regret that vote. It is so sad that Romney was not elected. This president is killing our country!! We are on the road to socialism for sure, with a lower standard of living for everyone.

  • Report this Comment On April 06, 2013, at 2:49 PM, Scarlet527 wrote:

    Since Reagan, The "No Time for Bonzo-Jerk," the Congress has been completely criminal and corrupt and the stealing, plundering, and transfer of the wealth of the taxpayers to the 1% has been underway...at the end of the "bell shaped curve" is the "grinning joker in black face" Uncle t"O"m (Obama), who was and has been nothing but the "water boy" for the 1%/Republicans...as a matter of interest, instead of DEMANDING that the 1% pay taxes on trillions of stolen taxpayer dollars out of circulation in the Cayman Islands and other clandestine hiding/tax free places, he chooses to 'SHAKE DOWN" hardworking "legal" American citizens, who have worked like mules for the social security earned over decades of work, just to be swindled by a grinning, lying, sociopath, who talks populist rhetoric and plays extreme-right offensives on the people who voted him into office. HE HAS MONEY IN CAYMAN ACCOUNTS...AND HE RECEIVED A 20 MILLION campaign bundle from WALL STREET and the same crooks on Wall Street...is there any reason why...then...that he is "stickin' it to granny?"...and nobody from Wall Street has gone to jail...while Henry Paulson (Goldman Sachs) walked out of government with 700 billion dollars...no questions asked???????

    Clearly, Uncle "O" has struck yet another blow to (his ever changing lying chameleon exterior/dubious interior)...his constituency and All Americans; sinking all their boats...simultaneously....when clearly he is just another greedy, war/fear mongering sociopath, not unlike Hitler, Mussolini, or Stalin....Bushes' instead of the Stalag for Seniors...they will simply languish...and die!!! While at the same time 30-60 million racist from other countries will be insourced and "legalized"....does any of it make sense...to you? Welcome to the "dreamtime of the black-faced" Manchurian Candidate for the 1%....IMPEACH FROM REAGAN TO UNCLE "O"...fight back....Let's create a THIRD PARTY...Vote for the "Justice Party!" ...and "get rid of" both criminal political parties.....DOWN WITH U.S. GOVERNMENT CRIMINALITY!!!

  • Report this Comment On April 06, 2013, at 4:14 PM, Pseudonymity wrote:

    @Scarlet527... Why don't you tell us how you REALLY feel about Congress, politicians and government in general? *wink*

    Although I agree that our political system is in dire need of a major overhaul, I think your diatribe would have garnered more empathy if you had made your point without the rash overuse of name-calling and questionable inferences.

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Chuck Saletta
TMFBigFrog

Chuck Saletta has been a regular Fool contributor since 2004. His investing style has been inspired by Benjamin Graham's Value Investing strategy. Chuck also can be found on the "Inside Value" discussion boards as a Home Fool.

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