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Scrimp and Sacrifice in Retirement? Don't Let That Be You. Here's How. Don't ignore the instability of social security and government-sponsored retirement accounts. Instead, confront these issues head-on

By Pamela Yellen Edited by Frances Dodds

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Many Americans will spend their "golden years" of retirement scrimping and sacrificing, according to a new study reported by the Wall Street Journal.

Related: How to Pay Zero Taxes Legally in Retirement

"A combination of economic and demographic forces has left older Americans with bigger bills and less money to pay them," the report states. The report adds that Americans approaching retirement today face:

  • Stagnant incomes: "Americans are reaching retirement age in worse financial shape than the prior generation, for the first time since Harry Truman was president … Their median incomes, including Social Security and retirement-fund receipts, haven't risen in years, after having increased steadily from the 1950s."
  • High debt: "Gains in life expectancy, combined with the soaring price of education, have left people in their 50s and 60s supporting adult children and older relatives. Some are likely to have to rely on professional caregivers, who are in short supply and are more expensive than informal arrangements of the past."
  • Paltry 401(k) retirement funds: The median income those accounts will provide is under $8,000 a year for a household of two.

What does a reduced lifestyle in old age look like?

According to the report, 40 percent of pre-retirees will have to reduce their lifestyle in retirement. What does this reduced lifestyle look like? Countless older Americans are already finding out: For some, a reduced lifestyle means working multiple low-wage jobs and constantly scrimping to try to make ends meet. It means giving up on dreams of travel and leisure, and niceties they once considered necessities.

Some are even forced to turn to their kids for financial help. Others have given up on the idea of retiring completely and plan to keep working until they die.

The safety nets earlier generations relied upon are fraying, with ever-widening holes. Social Security will "become depleted and unable to pay scheduled benefits in full on a timely basis in 2034," the the fund's trustees said.

"Once this excess cash is completely gone, an estimated benefits cut of up to 21 percent may be needed to sustain payouts through the year 2092, without any further cuts," one analysis states. Yet increasing numbers of people expect to rely on the program as an important source of retirement income.

Related: Does Your Retirement Plan Pass the 3-Point Check-Up?

Although pensions are a thing of the past for most private-sector workers today, there are still many people nearing retirement who rely on them. Many public-sector workers who expected a pension for life are living with uncertainty as cash-strapped governments consider pension cuts to cover their massive unfunded liabilities. The Federal Reserve estimates that public and private pensions were underfunded by 27 percent last year. That has some experts warning that pensions may fuel America's next financial crisis.

Ignoring these problems won't make them go away ...

Too many people have turned a blind eye to these ominous trends. Their reaction is to keep their heads down, continue working and contributing to their company sponsored 401(k) plans and hoping for the best. But putting your head in the sand won't make these problems go away.

Entrepreneurs and small business owners especially can't afford to take the ostrich approach. Yet, planning for the future often takes a back seat to the relentless demands of building and running a business. Perhaps you left a company job to go out on your own and rolled your 401(k) funds into an IRA. "Set it and forget it" rarely works when it comes to the demands of business, and it's unlikely to secure you a comfortable retirement free from financial worry.

The good news is that there are steps you can take to claim responsibility for your financial future. These start with not making the same mistakes everyone else is making. Here are some pointers to help you craft a fiscally sound, self-sufficient plan that won't leave you having to constantly scrimp to survive in retirement.

Five tips for a financially secure retirement

1. Don't rely too much on volatile, unpredictable, government-sponsored retirement accounts for income in retirement. If you don't know the minimum guaranteed value of your savings when you want to tap into them, you don't have a plan -- you're gambling.

2. Don't rely too much on Social Security or a public pension fund, for the reasons discussed above.

3. Use the currently recommended savings withdrawal rate of 2.8 percent when you calculate how much you'll need in retirement. And, to avoid living longer than your money, assume you'll live to at least age 95. There's a good chance you or your partner will.

4. Save more in guaranteed, safe, and liquid assets. Put more of your savings into financial vehicles that aren't subject to the high volatility of markets, such as stocks, real estate and other risky investments.

5. Make sure you can answer "yes" to the following questions before committing money to any financial vehicle or product:

  • Will this piece of advice or vehicle give me peace of mind and let me sleep at night?
  • Will it help me get where I want to go without taking unnecessary risk?
  • Will it allow me to be in charge of my money?

Related: What Is $1 Million Really Worth in Retirement?

Knowing with certainty how much money you will have upon retirement and what every step along the way looks like is the key to building a future free of worry. It's the only true way to plan for your own needs and decide the kind of lifestyle you want to enjoy in your golden years -- instead of having that decision made for you.

Pamela Yellen

Financial security expert

Pamela Yellen is a financial security expert, a two-time NY Times best-selling author and President of Bank On Yourself. Pamela's latest book is "Rescue Your Retirement: Five Wealth-Killing Traps of 401(k)s, IRAs and Roth Plans – and How to Avoid Them."

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