Long-term Investing

How to rescue your retirement at 55

Elizabeth MacBride, Special to CNBC.com
How to rescue your retirement at 55
How to rescue your retirement at 55

If you're 55 and fearing that the only way to rescue your retirement is a time machine, you are not alone. You're also not out of options.

The typical household made up of Americans in the 55-to-64 age range has accumulated only enough retirement assets—$120,000—to produce $400 to $500 of income a month to add to Social Security payments, according to the Federal Reserve's Survey of Consumer Finances. If that sounds shockingly low, it is.

You've lost the advantage of time, which helps people in their 20s and 30s to use the power of compounding interest to reach their retirement goals, but you do have other financial tools at your disposal. The most powerful lever: capping or reducing consumption. Every dollar you don't spend in your 50s, after your kids fly the nest, pays you back twofold. Not only can you save it now, you won't feel the need of it later.

"You want to have a lifestyle you can maintain," said Alicia Munnell, director of the Center for Retirement Research at Boston College. "It's not saying you can't enjoy yourself. You can still travel, but go off season. Use Expedia."

(Read more: How to tell whether your 401(k) stinks)

In the first two-thirds of your life, your goal is simple and direct: accumulate assets. As you approach retirement, your goal becomes twofold: While looking to accumulate assets, you must also preserve them to ensure a sustainable monthly income—and consider how to reduce your monthly expenses.

Do not think you're going to invest your way out of this.
Harold Evensky
President, Evensky & Katz

Reduce your consumption
One of the biggest financial mistakes parents make is increasing spending after the kids finish college and the mortgage declines. Research published in 2010 showed that households ramp up spending on things like food and travel by 51 percent on average when their children leave home.

Maintaining the frugal ways you adopted when raising your kids is a good idea. "People are surprised by how much of a difference it makes," said Steven Sass, program director of the Financial Security Project at the Center for Retirement Research.

You can play around with the assumptions here, using a tool created by the Center for Retirement Research that shows how much of a difference spending decisions of today can make later in life. Consider, for instance, the following profile:

• You are 55 and plan to retire at 62

• Unmarried

• Earning $100,000 a year

• Setting aside $500/month in your 401(k)

• Have $120,000 in retirement savings

(Read more: The most widely held stock in 401(k) plans is ...)

The Center projects that, using the profile above, you will need a monthly income of $5,500 to maintain your lifestyle. But your investments and Social Security will only be producing $2,200. That's a gap of $3,300. Here's the trick: If you reduce your spending by an additional $500 a month now, you'll close the gap by $600 to $2,700, because you've reduced your needs by $500 and socked away enough to add $100 to your monthly income through investment gains. The biggest difference comes not from the investments you make, but from the reduction in spending. (The tool's earnings assumption for a portfolio investing 50 percent in stocks and 50 percent in bonds is 4.5 percent a year).

Peter Gridley | Getty Images

Don't plan for retirement; plan to keep working
If you're in your mid-50s, you've probably started to consider when, exactly, you will retire. Working longer means you not only extend the years you are adding to your retirement savings, but it reduces the number of years you need your savings to support. In the example above, working in the same job for another three years, until you are 65, reduces your gap to $1,900 a month.

What if you're burnt out? If you start planning now, you may be able to find a middle road, a second career into which you can transition in your early or mid-60s. In addition, if you delay taking Social Security, the government will increase your monthly benefit. If you are 55 (born in 1958), delaying retirement until age 70 will increase your monthly Social Security benefit by about a quarter, so that if you were set to get $1,000 each month, you'll get $1,267 instead. Social Security offers a website to help you figure out how much of a difference delaying will make.

(Read more: Six feet under as a retirement plan)

Stay in equities longer than you may think 'safe'
"Do not think you're going to invest your way out of this," said Harold Evensky, an investment advisor whose firm, Evensky & Katz LLC, is based in both Miami and Lubbock, Texas. But if you're shifting your planned retirement date, you also should extend the time frame of your investment portfolio. You can increase the chance that you'll earn a higher return by staying in equities for longer and in a greater proportion. Also, in this environment many experts say that bonds are a riskier investment than they usually are, because the government has been keeping interest rates artificially low.

In the post–World War II era, when interest rates rose after a long period of artificially low rates, bondholders lost money. "Since you will probably live to about 85, do not go into bonds until you are about 70, and then only gradually," said Charley Ellis, a consultant to governments and large institutions and a former board member of Malvern, Pa.–based Vanguard Group. (The average life expectancy for Americans is between 80 and 85).

Tap your house as an asset sooner rather than later
If you sell your house and downsize, you'll be able to use the proceeds to add to your retirement savings, tax rules permitting. You'll also be taking a huge step toward reducing your monthly expenses. Selling a house is an emotional decision for many. But if you believe you'll have to downsize eventually, the sooner you can practically make the move, the better off you will be.

By Elizabeth MacBride, Special to CNBC.com