5 steps to rescue your retirement finances

The director of BC’s Center for Retirement Research shows that it’s never too late to improve your bottom line.

Baby boomers are facing a brewing retirement crisis. Since they’re living longer, they’ll need more money than previous generations, yet health care costs are rising and inflation-adjusted interest rates are at historic lows. And just as boomers will need more retirement income, they’ll be getting less. Traditional pensions have been replaced by 401(k) plans, which aren’t working well. On top of that, current Social Security replacement rates — benefits as a percent of pre-retirement earnings — are gradually declining as the “full retirement age” rises from 65 to 67, Medicare premiums are taking a bigger bite of benefit checks, and more people are paying taxes on their benefits.

Without any changes, roughly half of boomers approaching retirement will not be able to maintain their standard of living. That’s the bad news. But at the Center for Retirement Research at Boston College, we know there is good news, too. With a little planning, many people can make specific and doable adjustments to improve their retirement security. And they can start right now:

1) WORK LONGER

In many ways, boomers tend to be healthier and have less physically demanding jobs than their parents and grandparents did. And since they are living much longer, stretching out work is a sensible option. The payoff for doing so is dramatic — delaying Social Security benefits from age 62 to 70 increases monthly payments by 76 percent, allows time for 401(k) balances to nearly double, and shortens the number of years spent dependent on a nest egg.

2) PAY ATTENTION TO YOUR 401(K)

Those with 401(k)s are the lucky ones. Half of private-sector workers do not participate in any retirement plan at their current job. The key for those approaching retirement with a 401(k) is to make sure they have the appropriate mix of stocks and bonds and that the money is in low-fee funds — high fees can substantially reduce the amount they will have to spend. Be careful about rolling over 401(k) balances to an IRA, because fees are often high and the provider is not required to act as your fiduciary.

3) SPEND WISELY (BUT SPEND!)

In retirement, boomers need a sensible strategy for drawing down their 401(k) assets that will balance the risks of spending too quickly and outliving their savings or spending too cautiously and taking an unnecessary hit to their standard of living. For at least part of your 401(k) balances, consider annuities — particularly advanced life deferred annuities that are less expensive and start paying out at, say, age 85. For other assets, a reasonable option to consider is following the IRS’s required minimum distribution rules.

4) LEVERAGE YOUR HOUSE

Many people think of their house as a last-resort fund or as a bequest for their kids. But the days of ignoring housing wealth are over. Most people will need to tap their home equity — either by selling and downsizing or taking a reverse mortgage — to help pay monthly bills in retirement.

5) SPEAK UP

On the savings front, most boomers will probably be grandfathered from any cuts required to fix Social Security. But they should make clear to their congressional representatives that reforms should lean much more toward increasing revenues for the program than cutting its benefits. That’s a message that won’t just help boomers but will also benefit generations to come.