From Washington Post:
WASHINGTON — Nearly three out of five middle-class retirees will probably run out of money if they maintain their pre-retirement lifestyles, a new study from Ernst & Young has concluded.

The study, set to be released Monday, finds that Americans will have to drastically reduce their standard of living before retirement to live comfortably, or even avoid destitution, later in life.

Middle-income Americans entering retirement now will have to reduce their standard of living by an average of 24 percent to minimize their chances of outliving their financial assets, the study found. Workers seven years from retirement will have to cut their spending by even more — 37 percent.

"People are going to have to adapt in a number of ways that they weren't anticipating or hoping for," said Tom Neubig, national director of the Quantitative Economics and Statistics practice at Ernst & Young. "I think a lot of people are hoping to maintain roughly the same standard of living after retirement. Our study suggests they are going to have to make some changes."

About 77 million baby boomers are expected to retire over the next few years. The study warns of an impending national crisis if workers, and lawmakers, do not react now to the changing pension structures in corporate America.

Most companies have moved away from defined-benefit plans, in which they provided their retirees with a set benefit each month, to defined-contribution plans such as 401(k)s, in which the employee takes most of the responsibility for saving money.

But with the U.S. savings rate abysmally low and people underestimating their life spans, economists warn that people will have to work longer if they do not spend less.

And cutting back on spending is no small feat at a time when inflation and the cost of living are rising. Fluctuating investment returns on 401(k)-style plans in this wobbly stock market are not helping matters.

"Most people, if they look at their life expectancy and they think they will live to 90, they are nuts to retire at 60. They're going to be living in poverty at 80," said Peter Morici, an economist at the University of Maryland. "I think it's a wake-up call to baby boomers to get serious about getting their houses in order."

The study was commissioned by Americans for Secure Retirement, a coalition of more than 50 organizations representing women's, small-business, agricultural, Hispanic and African-American groups, among others. It looked at married and single near- and recent retirees at three pre-retirement income levels: $50,000, $75,000 and $100,000.

The study strongly affirmed that retirees with a guaranteed source of retirement income beyond Social Security would be much better prepared.

If a married couple is making $75,000 at retirement and relies solely on Social Security, they have a 90 percent chance of running out of money if they maintain their pre-retirement lifestyle. The addition of income aside from Social Security drops the couple's chance to 31 percent.

Congress has taken up the matter. One bill, for instance, would make it easier for workers to get a particular non-Social Security retirement vehicle: an annuity, which is an income-generating contract between the employee and an insurance company. The legislation would exclude from taxation 50 percent of the income received from a lifetime annuity, up to $20,000 per year.

"It's that paycheck every month for the rest of their lives that will allow people to have some standard of living," said Joe Reali, chairman of Americans for Secure Retirement, which has life-insurance companies as members.

But David Armstrong, managing director of Monument Wealth Management in Alexandria, Va., repeated the oft-cited advice that the best way for Americans to live well in retirement is to plan for it early.

Save money and make sure to start your 401(k) at an early age, he said. Figure out what your nonnegotiable expenses and assets are. If you don't have enough money to cover your necessities, he said, cut out any luxuries in your lifestyle.

"Eating out five nights a week, is that something that is important, or is that something you can forgo?" he said. "Retirement ends up being a negotiation."