Retirement for the not-so-rich
By Bankrate.com


Not prepared? You can still retire, but you might have to work part time, scrimp a little, tweak your investment strategy -- and maybe hold a garage sale.

As the baby-boomer generation reaches retirement age, many are facing the harsh reality of a less-than-cushy nest egg. Some put their kids through college at the expense of long-term savings. Others simply didn't save enough.

Indeed, the 78 million Americans born between 1946 and 1964 are on track to replace about 60% of their annual incomes after retirement, according to the Fidelity Retirement Index. The national survey by Boston mutual fund giant Fidelity Investments also found that boomers set aside an average 4% of annual income. So much for maintaining their current standards of living.

Despite the size of their bank accounts, however, many boomers (the oldest of whom are turning 60 this year) are unwilling to put retirement plans on hold. With less money to live on and life expectancies on the rise, seniors who failed to feather their nest eggs may have to get creative to make ends meet, says Brent Meiser, a certified financial planner.

Go to plan B

"I think a lot of people are just drifting into retirement and haven't necessarily done things like calculate what their expenses will be or taken a dry run on living with a more modest income stream," says Meiser, who also serves as director of collaborative programs for the National Endowment for Financial Education (NEFE) in Denver. "If you've undersaved, you may still be able to (retire on time), but you need to have a plan B in place."

That includes moonlighting. Some 67% of boomers plan to work at least part time for extra income during retirement, according to Fidelity spokeswoman Erika Soto.

"Part-time jobs, even if they don't offer benefits, give you a little extra cash, and that can be just enough to give you a comfortable margin to live on," says Clare Hushbeck, an economist for AARP. "You can treat it almost as you would a hobby, taking a job that teaches new skills you've always wanted to master. It's also a great social outlet."

Retirees who leave their full-time jobs for consulting gigs or part-time posts should set aside most, if not all, of their income for retirement, notes the National Endowment for Financial Education in its "Late Savers Guidebook." By saving just $5,000 a year in an investment with a 7% annual return, you could accumulate nearly $69,082 over 10 years.

Boost your budget

Spending less, of course, is another key component to making your money last. But shoestring budgets can be tough to swallow for those who haven't had to do without, Hushbeck says.

"Choosing to downscale your consumption is a no-brainer, but it's not so easily done," she says. "Many recommendations are of the spinach variety: They may be good for you, but you're not going to like them."

Scrapping such things as high-speed Internet access, cell phones, cable TV and high-priced social clubs, however, could save you hundreds of dollars per month and prevent you from raiding your nest egg's principal. Fewer dinners out will also help you control your budget.

Other tips for scraping up extra cash? Rent out a spare room in your home or hold a garage sale. Hushbeck says seniors ready to retire can often pay off credit cards, car loans or other high interest consumer debt by selling off attic treasures.

"It's amazing how much money you can make just by going through your basement and garage," she says. "It's very helpful to have this extra income, and it can sometimes make the difference between being able to stay put and having to move."

Put your house to work

Homeowners are perhaps best positioned to bridge the gaps in their retirement funds, especially those in areas where property values have soared.

Trading down to a smaller home, for example, will not only reduce your monthly mortgage bill, but also free up extra cash from the sale of your home to invest for future income. Investing just $50,000 in home-sale profits at an average 7% return would produce $3,500 in annual income; $100,000 invested at that rate produces annual income of $7,000, while a $300,000 investment would yield $21,000 per year.

You'll get the biggest bang for your buck, of course, by relocating to a lower-cost area altogether, paying in full for a smaller abode and investing the difference. If you currently reside in the Northeast or on the West Coast, for example, retiring to the South or Midwest will almost surely save you money. But Hushbeck of AARP warns all retirees to look before they leap. Too many, she says, let tax havens alone become their guides.

"Moving to states like Florida or Texas that don't have an income tax could save you money, but you might find that states with lower taxes also have a lower provision of services," she says. "When you're young and healthy, that's not much of an issue. But as you get older, you'll have infirmities. Some retirees actually relocate to enjoy the tax benefit when they don't need health services and (then) move back in their 70s."

The other major drawback to moving out of state? No friends or family nearby. Without a family support network, you'll likely incur higher expenses for caregivers as you age. You'll also need to factor in a bigger travel budget for trips back home.

In its "Late Savers Guidebook," NEFE suggests that anyone looking to relocate during his or her golden years should visit the area first and, if possible, rent before buying. Inquire about medical facilities, cultural and entertainment attractions, weather and employment opportunities.

If you're not ready to pack your bags, there's another way to tap the value of your home. Reverse mortgages allow homeowners 62 and older who own their homes outright to convert a portion of their equity into cash.

Unlike a traditional home-equity loan, homeowners need not repay the money they borrow until they sell the house or pass away. When your home is no longer used as your primary residence, you or your estate repay your loan in full, plus interest and other fees. Take note, however, that reverse mortgages are complicated, and closing costs are high. They also reduce the value of your estate.

Still, reverse mortgages can be an excellent source of extra cash, says Richard Bergen, a certified financial planner and accountant in Garden City, N.Y.

"Certainly, for retirees who may not have saved as much as they would have liked, their home can become a valuable source of retirement income," he says.

Maximize investments

In the quest to outlive your nest egg, you'll also need to consider tax efficiency.

When making withdrawals from your retirement fund, for example, Meiser suggests tapping taxable accounts first -- such as personal investment accounts -- since the taxes have already been paid on those earnings. Next, move on to tax-free assets, such as municipal bonds.

If you can hold out, NEFE recommends waiting until age 70½ to touch your tax-deferred accounts, such as 401(k) plans and traditional IRAs. That's the age when minimum withdrawals must be made from most retirement accounts. Waiting longer maximizes the benefit of compounded interest.

Retirees, especially those who undersaved, should also resist the urge to begin collecting Social Security early, says Meiser.

"You can make that check larger if you wait a bit beyond the first time you're eligible," he says. "That's one of the more basic strategies for bridging (a retirement fund shortfall). You want to try to maximize that check as best you can by using other funds first. That's an investment decision that will pay off year after year."

Finally, Meiser says, retirees should deplete Roth IRAs last, since they have no minimum withdrawal age and earnings grow tax free.

Though conventional wisdom holds that retirees should reduce portfolio risk by keeping equity exposure down and bulking up on bonds, Bergen says investors who undersaved may have to assume a slightly higher level of risk. Just keeping up with inflation, he notes, is not good enough.

"If you find that you have to draw down more than the recommended 4% or 5% of your investment principal each year, you may have to stretch for yield," Bergen says. "That means considering Real Estate Investment Trusts, or REITS, high-yield bonds and preferred stock."

When it comes to retirement planning, we all have good intentions. Unfortunately, we don't all save like we should. If you're among the millions who are ready to call it quits regardless of your nest egg's size, there are dozens of strategies you can employ to make your money last. Through part-time work, a strict spending diet and a well-timed withdrawal strategy, you can still pull off a comfortable, worry-free retirement.

"This is becoming more and more of an issue for my clients," says Bergen. "But if you can accept that you'll probably have to do some kind of part-time work, you can still work within the time frame of your original retirement date."

By Shelly K. Schwartz, Bankrate.com