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by Jim Hanson



The recession, increased competition for jobs, and age-related employment barriers have created a crisis for America's older workers. How can you possibly plan for retirement in this market? Like it or not, it's all about the B word: Budgeting. Don't like B, try P: Planning. And try to live below your means.

Set aside retirement money before you do anything else. It's what financial counselors call "paying yourself first." Give your savings an even higher priority than you do your home payment. If your workplace has a 401(k) plan, contribute the maximum that you can—that's a form of paying yourself first.

Set aside retirement money before you do anything else—it's what financial counselors call "paying yourself first."

Then make a lifestyle change. Economists and some financial planners call it "life cycle consumption smoothing"—a fancy way of saying you should arrange your borrowing and saving needs to last a lifetime. Extravagance at any age will never compensate for the unhappiness of poverty at another age.  Without scaling back their standards of living, three-fifths of new retirees could outlive their financial resources, according to an Ernst & Young Retirement Vulnerability Report.

The plan

So how do you keep spending steady over a lifetime? Focus on two core principles: safety and efficiency. Safety means not gambling on high-risk, high-reward ventures. Efficiency means being smart about how you allocate the money you do have.

Many people achieve that security by pooling risks with others. For older workers, if the prospect of outliving your retirement overwhelms you, consider buying an annuity. Some advisers recommend putting a quarter or more of your savings into annuities. Of course, the downside is the cost (it's expensive), and you lose control of the assets that you annuitize. Another consideration is long-term care insurance.

Keep spending steady over a lifetime by focusing on two core principles: safety and efficiency.

Annuities and long-term care insurance are not cheap, but the only alternative, apart from stock-piling savings and actively managing an investment portfolio, is probably luck. If you want to investigate consumption-smoothing principles, take a look at ESPlannerBASIC, a free online resource, developed by Boston University economist Laurence Kotlikoff. He sells the PLUS version for $199.

You also can take some additional steps to better prepare for your retirement years:

  • Consider working longer before you retire—it may help you keep your healthcare benefits longer. If you are out of work, investigate learning new job skills to make yourself more marketable.
  • Delay drawing on Social Security as long as you can.
  • Have a plan for healthcare coverage and out-of-pocket medical expenses; some say those costs could be as much as $225,000 during retirement.
  • If possible, pay off your mortgage before you retire. Don't rely on your house as your "retirement" savings program.

Remember that it is up to you, not your employer, to educate yourself and have a realistic plan to pay for your retirement. And above all, start your planning now.

Published January 25, 2010

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