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Planning your retirement? Prepare to live on less

Pessimism reigns among baby boomers when it comes to thinking about their retirement years: 41 percent expect their standard of living to fall, according to a recent study by the Transamerica Center for Retirement Studies. But they may not be pessimistic enough.

The actual percentage of boomers experiencing a decline in their retirement living standards will likely be far greater, given most people's modest savings.

Indeed, the Transamerica study paints a picture of reduced income for most people facing retirement in the years to come. Think you'll support yourself by working in retirement? The study shows that more than two-thirds (68 percent) of boomers want to phase into retirement and work less. But working less means less income.

Think you'll rely on Social Security and savings for retirement income? More than one-third (36 percent) report that the federal program will be their primary source of retirement income. Yet Social Security replaces far less than your spendable income while working.

How to plan for a successful retirement

Another 46 percent say their primary source of retirement income will be their savings. But survey respondents report a median retirement savings amount of just $127,000. This amounts to retirement income of roughly $5,000 per year, if you apply the standard "four percent rule" to generate retirement income.

Survey respondents also reported needing $800,000 in savings for a comfortable retirement. It's going to be very hard for boomers to put away enough money to boost their savings from $127,000 to $800,000, particularly if they're only working part-time.

Sixty-two percent of the respondents reported they're confident they'll be able to fully retire some day with a comfortable lifestyle, and 44 percent report they don't expect their standard of living to drop in retirement. Unfortunately, when you put all these statistics together, it appears that many people are hoping for a comfortable retirement but haven't made realistic plans to actually make it work.

This is just one more piece of evidence that our society is transitioning away from the idea of a full-time retirement, where employers paid for traditional pension plans, to a system where workers have more responsibility for funding and managing their retirement finances.

Investing for a secure and independent retirement

The harsher reality is that most people will be living on less income during retirement, given the meager financial resources cited above, or they'll need to continue working during their retirement years -- or some combination of these strategies.

Whether this is a problem for you depends, in part, on the tradeoffs you're willing to accept. For instance, do you really want freedom from work? If so, is that enough of a priority to be creative in cutting your spending? There's evidence that for many retirees, the answer is "yes," and that they define their standard of living by their satisfaction with life.

There's also evidence -- and good news -- that people spend less money as they age into retirement, as they figure out what is "just enough" to meet their needs and make them happy. One paper from researchers at RAND suggests that spending in real terms might drop by anywhere from 20 percent to 40 percent between ages 65 and 85.

The best way to deal with these financial issues is to turn worrying about retirement into motivation to start planning ahead. Take a hard look at how much money you'll really need, and devise a financial plan to get there. This includes figuring out if you'll be happy living in the same house or a smaller home, driving an older car, or buying less stuff. It's possible you can live on a lot less income if you've paid off your mortgage, your kids are financially independent, and you've finished making large expenditures on cars, furniture and appliances.

A sound retirement planning strategy also includes deciding how much you want to work and figuring out what kind of work is right for you. And you should consider the possibility that you might increase your spending in retirement on services you're not paying for now -- medical and long-term care.

You'll feel better about your future if you take action to make it better. Keep in mind that worrying about the future isn't the same thing as preparing for it, while hope doesn't constitute a financial strategy. Instead of sitting back and letting life just happen to you, plan for the standard of living that best suits your unique circumstances and goals.

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