How Boomers Can Close the Retirement Income Gap

Millions of baby boomers face some grim realities: a long life in retirement and inadequate savings.

A new report by the Insured Retirement Institute finds that a healthy 65-year-old male has a 50% chance of living to 84, and a 25% chance of making it to 93. For a similarly aged woman in good health, longevity is 89 and 93.

At the same time, the annuity lobby reported, 40% of boomers have no retirement savings, and 69% lack a defined benefit pension plan.

That's a huge problem. The report noted that annual expenditures today for the typical 65-year-old retiree exceed $50,000, and Social Security on average generates only $16,000 in retirement income a year.

This means that many boomers will have to look to their savings to close the income gap. But of those who have retirement savings, 59% have saved less than $250,000, and 37% less than $100,000.

Say the 65-year-old male lives three more decades. The report says he will need more than $1 million of investable assets on top of Social Security benefits to safely generate sustainable income sufficient to meet national average projected expenditures during the rest of his life.

Boomers on the verge of retirement with no savings and who are unable or unwilling to delay retirement are in the worst position, according to the report.

In order to reduce expenditures, they will have to make some unpalatable decisions, such as moving to a less expensive area, downsizing or even eliminating high-cost budget items such as transportation.

"I'll go out on a limb and venture that moving to Harlingen, Texas, which boasts the lowest cost of living in the country, is not a realistic option for most future retirees," IRI's president and CEO Cathy Weatherford said in a statement. "But many boomers will have to make some tough decisions.

Absent any savings at all, retirees will find it nearly impossible to make ends meet without help from family, friends or assistance programs.

Addressing the Income Gap

"The good news is that there are some things boomers can do to boost their savings and reduce expenses," Weatherford said. "Then by constructing a strategy — using a combination of retirement income sources — they can have a plan in place to meet their retirement needs."

The report lays out steps boomers can take to close the income gap.

For one, delaying retirement to age 70 has several advantages:

Social Security benefits are 32% more than the payment received if benefits start at 66
Lifetime annuity income is less expensive
There are five fewer years when savings are required to produce income and five more years to build up retirement savings

In addition, boomers 50 and older can play catch-up by contributing $6,000 a year to their workplace retirement plans.

They can also retire or move to an area with lower costs, particularly in expense categories that are personally meaningful.

And not least important, by maintaining the best health possible, they can lower their annual consumption of medical care.

— Check out How Much Income Do Retirees Really Need? on ThinkAdvisor.