Solving the Retirement Income Puzzle: How Will Baby Boomers Generate Income during Their Golden Years?

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WHILE SOME BOOMERS may have lived for the present at the expense of the future, Curtis and Hope Lee of Grand Prairie, Texas, don't fit that description. Retirement struck this couple as an inevitability they wanted to prepare for, and they began saving for it in earnest 26 years ago. Curtis, 53, a supervisor at Ford Motor Credit, and Hope, 51, a schoolteacher, expect to receive pensions from their jobs and Social Security when they retire. But because the couple wanted a secure retirement, they made sure to contribute to Curtis' 401(k). "Even back in the '80s, there was so much talk that we couldn't depend on Social Security, that it probably wouldn't be available by the time I got to retirement age," Curtis says. "We were counseled at my job that you need something besides the company pension and Social Security." Hope's job did not offer a retirement savings program at the time.

The Lees have been disciplined savers. When their sons, Corey and Carlos, now 34 and 26, went to college, the couple took out loans instead of using their retirement funds. In addition to building up their retirement savings, the Lees are preparing for a pared-down lifestyle once they stop working. They will also be paying down the college debt and raising their 10-year-old daughter.

"This is the first generation that for much of their careers has had to manage their own retirement savings and will now need to manage their retirement income," says Jacob Herschler, vice president of marketing with Prudential Insurance in Newark, New Jersey. The Lees are among 77 million baby boomers who are at or near a retirement that is structured around their own resources and that offers fewer guarantees.

BOOMERS OR BUST?

Boomers are retiring into an uncertain economic and political landscape. "We don't know what is going to be needed by baby boomers in retirement, because this is new territory/' says David Wray, president of the Profit Sharing/401(k) Council of America in Chicago, which studies 401(k) plans. "Current retirees benefit from the fact that there's a substantial pyramid beneath them working to support them. The shape of this pyramid will change drastically."

The retirement challenges this generation faces are relatively new. "All the evidence suggests that the past generation has done very well in retirement," says Mark Warshawsky, director of retirement research in Arlington, Virginia, with benefits consultants Watson Wyatt Worldwide. But pensions, once a cornerstone of retirement, are now a bit like Chevrolet Camaros: powerful, but belonging to a bygone era. Just 20% of private-sector employees are covered by them now and, according to AARP, this generation expects to rely less on pensions.

Social Security, the primary source of income for many retirees, has also become less generous. Retirement age for hill benefits has gone up to 67 for anyone born after 1960. Rising Medicare premiums (which are deducted from Social Security checks), and income taxes on Social Security benefits, are "effectively a benefit cut," says Andrew Eschtruth, associate director for external relations with the Center for Retirement Research at Boston College. Social Security replaces about 40% of the average beneficiary's pre-retirement income today, but will replace only about 30% in 2030, he says. Future retirees will be asked to foot a greater portion of the bill for their own retirements, all while living longer.

That said, it's more important than ever to plan for a well-funded retirement. Keep the following in mind:

* Work a bit longer. That may not be something future retirees want to hear, but working longer can make a significant difference in your retirement savings. According to the Center for Retirement Research, working just four years longer can boost the amount of your Social Security check by 33%; working eight years more can increase it by 75%. …