The expensive approach to retirement is to pile up so much money that you'll be safe no matter how long you live or what goes wrong with your health or the markets. But for many Baby Boomers, the amount required seems ridiculously out of reach.
Boomer assets in IRAs and defined contribution plans such as 401(k)s fell more than $2 trillion last year, according to the Investment Company Institute. The repercussions of the financial crisis will be felt for years in the retirement accounts of millions of Americans. Those who saved industriously have watched their account balances crumble, and the recession has set back that half of employees who lack even basic savings options like their 401(k)s.
The big idea is that you should arrange your borrowing and saving so as to achieve the highest possible standard of living that you can maintain reliably and steadily over a lifetime. The happiness you get from extravagance at any age will never compensate for the unhappiness of penury at a different age.
So, how do you squeeze the most spending power out of limited resources and still keep that spending steady over a lifetime? By focusing on two core principles: safety and efficiency. Safety means not gambling on high-risk investments to rescue your portfolio. Efficiency means being smart about how you deploy the money you do have.
To begin with, stop making a fetish of The Number--that fearsome string of digits some online calculator or investment advisor said you need to retire comfortably. You can do pretty well with low-risk strategies to eke out more of the savings you do have, such as postponing retirement; tapping equity in a home; delaying when you start taking Social Security; moving to a lower-tax state or into a smaller house; or simply cutting daily living expenses.
When you retire, its all about outlasting your assets. The solution is to pool risks by buying annuities that will keep paying as long as you live. Insurers can keep annuity prices reasonably low because profits from those who die young offset losses from those who die old. Some advisers say you should put a quarter or even half of your savings into annuities. The downsize is that you lose control of the assets that you annuitize. But the peace of mind is irreplaceable.
A good supplement to annuities is long-term-care insurance, which could save you from dreary years in a substandard, Medicaid-supported nursing home if you suffer a stroke or Alzheimer's disease. For both forms of protection, look for products that are indexed to inflation. Shop for low fees. Limit default risk by splitting the policies among multiple providers, all highly rated. For annuities, shave the cost by buying ones that don't kick in until, say 85.
Smoothing your consumption over a lifetime does require discipline. When you find yourself behind on saving, it's tempting to change assumptions about the future--say, plug in a higher expected rate of return on assets. That's less painful than trimming back your lifestyle. Face it, though: The stock market is beyond your control.
There are six months left in this decade, but it may not be too soon to start drafting its obituary. Looking at the numbers shows that investors calling the 10 years "lost" may have understated the case. As of June 30, the Standard & Poor's 500-stock index was down 37%, or 5% a year, from its December 31, 1999 close of 1469.25. So it would take quite a rally just to break even for the decade: The index would have to climb 60% by December 31, 2009. The last such negative decade? The dreadful 1930s, which suffered a 42% cumulative stock market loss.
The bottom line: Boomers never want to get into a situation where their golden years are hostage to the whims of the market.