The New 3 Legged Retirement Stool

Without a traditional pension, here’s what your retirement finances can stand on.

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I've been wrestling with the issue of how to structure a solid retirement for about ten years, since I was in my early 50s. I've looked for all the simple answers and easy outs, but haven't found anything along those lines other than to win the lottery, or inherit a small fortune.

Since I don't even play the lottery, and my count of rich uncles is zero, I've had to come up with a more realistic plan. It’s not as exciting as the rich-uncle option, but it’s a lot more reliable.

A blueprint for nailing down a realistic retirement and securing your financial future is to build a stool with these three sturdy legs:

1. Plan to work in early retirement. If you like your job and can keep it through your late 60s, you're in a good position. Don't blow it. Stay on the job. My dad kept his job until he was 71, even though he took a pay cut in his last few years. The extra dollars he earned and the savings he didn't have to spend made a big difference in his lifestyle over the next 20 years. Unfortunately, these days, many of us don't have that option. We're shown the door at 62 or 60, or even in our 50s.

You need a big nest egg—over $1 million—to support yourself for 30 or 40 years. But if you earn some income in your early retirement years, when you're still young and healthy enough to work, you will not only supplement your current cash situation, but also stretch your future assets. Once your career is over, there's no shame in making less money, or doing less prestigious work. Take a part-time job at the mall or your local government, or turn your cooking or handyman skills into a paying proposition. If you make just $20,000 a year, that's roughly the equivalent of having another half million dollars in the bank.

2. Live below your means. In our younger years, many of us live beyond our means, especially if we buy a house, maintain two cars, and support our children. Once the kids are out the door, it's time to reassess your needs. Set a goal to live on 20 percent less than your income, instead of 10 percent more.

You don't need a three bedroom home with a good school system anymore. If you can sell your house, you can buy or rent a smaller place in a town with lower real-estate taxes. If you can't downsize your home, you can downsize your transportation fleet. Maybe you can get along with one car instead of two. You certainly don't need a boat or an ATV anymore. You probably don't need to spend as much on clothes. Maybe you can skip the expensive vacation trip and take a staycation instead, taking advantage of the parks, festivals, and local theater groups around your hometown. You don't have to downsize everything, just enough to give yourself a solid cushion.

3. Invest in some risky assets. When my dad retired he could put his savings in a bank, collect 5 percent interest, and live off the proceeds. But today, with banks paying less than 1 percent, that's no longer an option.

You need to swallow hard and invest some of your savings in the stock and bond markets. Assuming your nest egg is less than $1 million, focus on low cost, no-load mutual funds. Vanguard, Fidelity, Schwab, and other companies offer plenty of highly rated stock and bond funds that will produce some income, along with the possibility of growth over time. One good alternative is a hybrid fund, like Fidelity's Asset Manager Fund (FFANX) or Vanguard's Wellington Fund (VWINX), that carries a mixture of stocks and bonds. Yes, there is some risk. But if you suffer a paper loss you can afford to sit tight as long as the other two legs of your stool are solid.

Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement, and other concerns of baby boomers who realize that somehow they have grown up.