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The nightmare retirement scenario

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By CNN Wire Service.
NEW YORK (CNNMoney) -- I retired five years ago, but the way things are going I think I'll be broke in five years. What should I do with the $100,000 that I have left? --A. H. North Carolina

It's the nightmare of retirement scenarios. You leave your job only to shortly find you've got to "unretire" or live a dramatically scaled back retirement lifestyle. This frightening possibility is why it's so important to do a rigorous pre-retirement check-up before exiting the workforce and to have a realistic retirement income plan in place that can provide sufficient income for the long term.

Fortunately, whether you find yourself in this tough position because of spending too much, unexpected setbacks, inadequate planning or plain old bad luck, there are ways to improve your situation, if you're willing to act quickly and be creative and resourceful.

The first thing you want to do is get an accurate fix on where you stand. If you go to T. Rowe Price's Retirement Income Calculator, you'll get an estimate of how long you may be able to continue on your present path before your savings run out.

You may find that you have more than five years, or less. Either way, you can get a better sense of how different moves might better improve your situation. And by revisiting this calculator every year or so with updated information, you can see whether you're making progress or accelerating the time your savings will be depleted.

Next, turn your focus to the two areas that have the most potential for turning your retirement around: gaining better control of your spending and trying to generate extra income by returning to work in some way.

Let's start with spending. The best way to find expenses you can eliminate or slim down is to rev up a good online budget calculator like the Retirement Budget Worksheet within Fidelity's Retirement Income Planner tool. Just enter all your current expenses and be sure to check the "essential expense" box next to those that apply. One you've completed this process, you'll know which expenses are essential and what portion of your total spending goes toward essential vs. discretionary outlays.

You'll generally find the best candidates for saving the most bucks in the discretionary category -- entertainment, eating out, cable and phone plans, etc. But comb through the essential expenses too. You may be able to save on auto and home insurance by going to a higher deductible or comparing quotes at various insurers. Maybe you can do a better job managing your utility bills. Even a lot of small cuts can add up and, if nothing else, can give you more time to regain your financial footing.

Now let's turn to generating some job income. Clearly, your ability to work will depend on your age, health, skills and the demand for workers in your area. Some people may actually be able to re-enter the workforce as a full-time employee; others may only be up to part-time or occasional work. That's a decision you'll have to make. But whichever route you decide is right for you, you can size up the demand for older workers for all sorts of jobs in virtually every industry in your area by going to sites such as RetiredBrains.com and Retirementjobs.com. As with cutting expenses, even small amounts of income can have a significant payoff, as any extra income will allow you to lower draws from your savings, making your nest egg last longer.

Remember, though, that work earnings can affect your Social Security benefits. If you're under full retirement age, your benefits could be reduced as much as $1 for every $2 you earn in excess of a certain amount ($15,720 in 2015). These benefits aren't actually lost; your payment will be increased to reflect the reduction once you reach full retirement age. And whatever your age, up to 85% of your Social Security benefits could be subject to income tax if the value of your Social Security plus other income exceeds certain thresholds.

You can get details on the earnings test by checking out the Social Security publication How Work Affects Your Benefit; for details on taxation of benefits, check out Income Taxes And Your Social Security Benefit. Better yet, if you plan to work, you should probably visit your local Social Security office to talk to a rep about what effects working may have on your benefits and whether there's any way to mitigate the effect (such as withdrawing your application or suspending your Social Security payments).

There are other ways you may be able to improve your prospects. If you have substantial home equity, you might consider selling and downsizing to smaller digs to lower annual housings costs and maybe come away with extra cash. Or you might consider staying in place and getting cash via a reverse mortgage. The Boston College Center For Retirement Research has an excellent primer, Using Your House For Income In Retirement, that compares those options.

If you really want to be adventurous, you could even consider relocating to an area with lower living costs, although there may not be much to gain if expenses are already relatively low where you live.

You'll notice by now that I haven't talked about the $100,000 you have left. That's because the moves I outlined above are much more crucial to your long-term retirement prospects than anything you can likely do with your hundred grand. It may be tempting to envision some way of earning blockbuster returns on your nest egg that will rescue you from your current dilemma. But that's not realistic, and shooting for big gains could easily backfire and leave you worse off than you are now since outsize returns always come with high risks.

Basically you need to do two things with your nest egg: First, tap it as little as possible, as that will extend its longevity. And second, invest it in a way that gives it a chance to grow so that, once you're back on firmer footing from cutting expenses and earning some job income, your nest egg will be in a better position to help fund your retirement. That means investing in a moderate-to-low risk combination of low-cost stock and bond funds. (Yes, CDs and money-market accounts would be safer, but they'll do little to help you long term.)

This risk tolerance-asset allocation questionnaire will suggest mix of stock and bond funds that should jibe with your risk tolerance and financial needs. Or you could check out the asset allocation for the Vanguard Target Retirement fund for someone your age and use that as a guide. At some point you might consider devoting a portion of your nest egg to an immediate annuity in return for lifetime payments. But that's a possibility better explored after you stabilize your retirement finances.

I know that some of what I suggested won't be easy to pull off. Some moves pay off big, others not so much. But if you really want to get your retirement back on track and have a reasonable shot at a secure future, this is the kind of broad, comprehensive effort it's going to take. And the sooner you start, the better.

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