Like many baby boomers, Michele Stone and Dale Echnoz are revising their plans. "We're in major saving mode," says Michele, 56, a onetime recording engineer now working an office job while weighing whether to return to school to become a teacher. She and Dale, 60, a retail store designer, have accumulated roughly $500,000, helped by a windfall on a house sold at the peak of the real estate market. But after the gyrations of the past two years, their retirement investments stand about where they were five years ago--and the Marietta, Ga., couple would like to have at least $250,000 more socked away before they stop working. New goal: saving $2,700 a month by, for starters, forgoing a vacation and a new car.

"I plan to work until I'm 70," says Barbara O'Brien, 59, of Elkins Park, Pa. The high school librarian aims to maximize her pension and Social Security benefits after losing roughly 35 percent of her retirement savings in the stock market rout.

"Goodbye, second home in Mexico," laments Melanie Hamilton-Smith, 48, of Reston, Va. She and her husband, Andrew Erwin, 63, a federal government consultant, expected to be luxuriating by now at a retirement getaway south of the border. Instead, he has put off his retirement for three or four more years and they are doing some serious belt-tightening in a campaign to save $5,000 a month.

Shared epiphany.

Baby boomers whose formative years coincided with a 25-year bull market are now having a painful collective epiphany. Yes, their IRAs and 401(k)s, which plummeted by a third during the 2008 bear market, have rebounded. But at the end of the second quarter, total retirement assets of $7.5 trillion had climbed back only to the level reached during the second half of 2006, according to an Urban Institute analysis. Faced with making up the lost years in much more anemic times, many pre-retirees are rapidly recalibrating their expectations. "The loss of confidence in financial markets is instilling a deep sense of insecurity," says Olivia Mitchell, director of the Boettner Center for Pensions and Retirement Research at the University of Pennsylvania's Wharton School.

Working longer is a given for many who still have a job or can find one; last year, the number of retirement-age people still in the workforce was up more than 7 percent from the previous year, rather than an anticipated 4.5 percent, federal figures indicate. Besides offering extra time to save and recoup losses, staying employed also allows retirees to squeeze more from Social Security. One troubling trend during the past couple of years of layoffs was that people out of a job at retirement age had no choice but to begin collecting their benefits, whether they wanted to or not. Last year, applications for Social Security retirement benefits were about 5 percent higher than expected, due to the recession. And nearly three fourths of those who retired last year did so before their "full" retirement age, which will cost them. Someone owed $1,000 a month at his or her full retirement age of 66 takes a permanent cut to $750 at age 62--and would collect $1,320 by starting the clock at 70.

Still, with the employment outlook also uncertain, boomers who hope their nest eggs will support them for two decades or longer should immediately find ways to ratchet up their savings, advisers say. While a majority of workers believe they'll need at least $500,000 when they retire, according to surveys by the Employee Benefit Research Institute, less than a quarter of those 55 and older say they've saved even half that amount. Someone who now has $250,000 and wants to retire in 10 years with $500,000 would need to save roughly $870 a month and earn 4 percent (after inflation) on investments. Most advisers say it's reasonable to withdraw around 4 percent of assets annually in retirement, which would mean a monthly payout of about $1,670. Research from Vanguard suggests that at that withdrawal rate, a portfolio conservatively invested 20 percent in stocks and 80 percent in bonds has a good chance of lasting 25 to 30 years. To get closer to $700,000, say, you'd need to stash away $2,250 a month beginning today.

Not so coincidentally, making do with less is becoming downright trendy, part of the "new frugality" championed in a number of recent books, including The New Good Life: Living Better Than Ever in an Age of Less by John Robbins, the Baskin-Robbins ice cream heir turned natural-lifestyle guru. "Most people will admit that of the 15 things they 'must' have, there are 10 they can live without," observes Bonnie Hughes, a financial planner with offices in Reston, Va., and Miami. Robbins, 62, who lost much of his wealth to investment scam artist Bernie Madoff, urges boomers to make a game out of saving money. "This game isn't about denying your pleasures. It's about plugging the money leaks that you may have been only dimly aware of, but which have been draining you," he explained by E-mail. Marc Schindler, a financial planner in Bellaire, Texas, tells of one creative client who lives as a "home tender" to cut his expenses. He occupies a house that's listed for sale at $400,000, providing furnishings to impress potential buyers, and pays just $800 in rent, a fraction of what a mortgage would be. He might have to move at any time, says Schindler, but "it's a great option for a single, divorced guy."

Downsizing.

Hamilton-Smith and her husband downsized a year and a half ago, selling their three-story townhouse, auctioning much of its contents, and buying a one-bedroom condo. They still allow themselves the occasional meal out, but she chooses an appetizer instead of an entrée, and they skip the bottle of wine. They've stopped using credit cards. "Sunday movie and brunch out seems pretty luxurious," Hamilton-Smith says, "considering the alternative of being broke and destitute in old age."

It goes without saying that employees should be contributing the maximum amount to a 401(k) plan or an individual retirement account. For those 50 and older, that can include an additional $5,500 a year in "catch up" contributions to a 401(k) and an extra $1,000 to IRAs. Already there? Some advisers are now counseling clients to also consider funding a tax-advantaged health savings account, as Stone and Echnoz do. You must be enrolled in a high-deductible health insurance plan to qualify, but a family with this option can contribute $6,150 per year, plus an extra $1,000 in catch-up contributions per person for those over 55. The contributions are tax-deductible, and any funds not used grow tax-deferred, as a sort of stealth IRA. If you withdraw the funds before age 65 for non-medical purposes, you'll pay a hefty penalty. But after that, you can withdraw the funds penalty-free for any purpose--although you'll pay regular income tax if you use the money for non-medical costs. "We consider it a savings account," says Stone.

What if, like many baby boomers, you're just now also trying to put kids through college? Those plans may bear revising, too. "You're not really being selfish," says Eric McClain, a financial planner in Birmingham, Ala., who urges clients with competing interests to fund their retirement needs first. "You're preventing your children from having to take care of you later in life." Seattle computer analyst Trent Hainer, 50, had already talked to his children about the need to work during college and perhaps attend community college for the first two years when his longtime employer this past spring outsourced his job (and him) to a company that offers less generous retirement benefits. "You just don't know what's going to happen," he says.

So, for example, you might consider paying off your mortgage instead of funding a 529 college savings plan, says Owen Malcolm, an investment adviser in suburban Atlanta. He also suggests diverting 401(k) savings above the level of the employer match toward paying down the home loan, even if it's at a low interest rate, so as to get out of debt. "Where else can you find a risk-free 5 percent rate of return?" he says.

Reality check.

Indeed, boomers accustomed to double-digit returns in good years need to be realistic about the next five years or more. In a slow-growth economy burdened by crushing government debt and potentially higher inflation, some advisers are running models for their currently retired clients based on an average annual return of 4 percent after inflation over the next five years. Harold Evensky, a wealth manager in Coral Gables, Fla., forecasts perhaps 6 percent per year on average over the next decade. He says an allocation of 40 percent bonds and 60 percent stocks is reasonable for investors with little stomach for market gyrations and urges a "core and satellite" strategy for stocks. That means roughly 80 percent invested for the long term in domestic and international index funds or exchange-traded funds, to keep expenses low, leaving 20 percent for riskier shorter-term bets such as emerging market funds or commodities.

To compensate for more muted domestic returns, most people will still want some holdings in emerging economies such as India, Brazil, and especially China, whose economy grew in double digits for the first two quarters of this year, compared to last year. Larry Ginsburg, a financial planner in Oakland, Calif., likes the Matthews Asia Funds as an option for indirect investment in China. As of June 30, Matthews Asian Growth & Income Fund, for example, had a benchmark-beating three-year average annual return of 2.04 percent. It was up 20.50 percent for the year ended June 30.

While many shun gold investments as a bubble waiting to burst, Lyn Dippel, an adviser in Columbia, Md., sees a role for gold as a way to counteract sluggish overall market returns. "You've got to be a little creative," she says, citing SPDR Gold Trust as a good possibility because it holds gold bullion, rather than riskier mining companies. The fund was up 24 percent for the year ended July 31, compared to about 14 percent for the Standard & Poor's 500 index.

Henry "Bud" Hebeler, a Seattle-based personal finance expert, favors defensive steps right now, reasoning that growing U.S. debt is bound to trigger higher inflation. He thinks boomers' bond portfolios should include TIPS (for "Treasury inflation-protected securities") or U.S. Treasury I bonds. I bonds, like traditional savings bonds, pay a set interest rate, but add an extra payment each year to keep pace with the cost of living. Taxes aren't due on interest earned until the bond is redeemed. TIPS pay a fixed interest rate, but the bond's principal is adjusted twice a year according to inflation. Interest earned on TIPS is taxable when paid, so it's best to hold the bonds within an IRA, Hebeler says.

One option for boomers too rattled by volatility to comfortably manage their own diversification is a target-date fund. Such funds automatically reset the distribution of money in stocks, bonds, and cash to a more conservative mix as retirement approaches. Many target-date funds hold other funds managed by the offering firm; Fidelity's Freedom Fund 2020, for example, held positions in 27 different Fidelity funds as of June 30.

The sales pitch: "The value is the diversification of underlying funds, and the professional manager who changes the asset allocation to make sure the mix is appropriate for your time horizon," says John Sweeney, executive vice president of planning and advisory services at Fidelity Investments. The funds can help prevent investors from fleeing the market during downturns, a common problem that really sabotages results. A study by research firm Dalbar Inc. reveals that for the 20 years ending in December 2009, annualized returns for the S&P 500 index were more than 8 percent, but returns for the average stock investor were just over 3 percent.

Someone who is 55 and wants to retire in 15 years, for example, might invest in a fund targeted for 2025. Vanguard's Target Retirement Fund 2025, for example, currently has 60 percent of assets in domestic stock funds, 15 percent in international stock funds, and 25 percent in bond funds. At the target date, that breakdown will be more like 40-10-50. The fund, which has lower expenses than its peers, was down more than 5 percent on average for the past three years, but up nearly 14 percent for the year ended June 30.

One significant caveat: Investors must be comfortable with their fund's projected stock allocation as it nears its target date. When the market imploded in 2008, some funds with 2010 target dates suffered significant losses--24 percent on average, according to the Securities and Exchange Commission--because they had fairly hefty holdings in stock. The meaning of the dates in the funds' titles varies from firm to firm; some funds don't reach their most conservative allocation until many years after the target date. The 2010 funds rebounded in 2009 with average returns of 22 percent, but public outcry and proposed action by members of Congress led the SEC this spring to propose additional disclosure in the funds' marketing materials, such as graphs outlining asset allocation over the full life of the fund.

People close to retirement and looking for some certainty might want to weigh a single premium immediate annuity. An SPIA, essentially a contract with an insurance company, provides a fixed, guaranteed stream of payouts for life in exchange for a lump-sum payment up front. For example, a 67-year-old Massachusetts man could hand over $100,000 and receive $663 per month until he died, according to the quote service www.immediateannuities.com. You still need to make your decision with care. Guaranteed payments depend on the insurance company being around to make them.

Available at Amazon.com:

Lifecycle Investing: A New, Safe, and Audacious Way to Improve the Performance of Your Retirement Portfolio

Worry-Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals

Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard--Today and When You Retire

The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living

 

Personal Finance - Retirement Planning: Taking Stock and Coming Up Short

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