Baby boomers face retirement challenges.

While baby boomers have enjoyed a generally improved quality of life over the past decade, as many as 25 million, or nearly one-third, have virtually nothing saved for retirement and face a shaky retirement picture, according to a recent study by the AARP.

The 76 million baby boomers who will turn 65 during the next two decades face many retirement challenges, including ballooning health care costs, the rising age for full eligibility for Social Security benefits (this rising age requirement is based on a person's birth year) and a recent three-year bear market and lower returns on investments. Two main retirement problems were identified by the recent AARP study. First, the study noted a significant drop in median income last year for the 50-and-over crowd. Secondly, it revealed a heavy reliance by many retirees on Social Security for a large part of their annual income, with nearly half Of retirees looking toward Social Security to provide more than half of their annual income.

Furthermore, while the number of retired people receiving pensions increased nearly 10 percent in the past decade, rising to nearly 50 percent, more than 50 percent of the retired community remains without pension compensation. What can boomers do to best prepare for and protect their pending retirement?

Plan, Plan, Plan

The federal government is encouraging savings with increased contribution limits and even offering catch-up contributions for those 50 or older. Create or update your financial plan to take advantage of these opportunities to save.

Your financial plan should include an assessment of how much you need to save for retirement and what percentage of pay you should be putting aside to get there. Your plan should include holding assets in many segments of the market. An investment mix for baby boomers should aim to keep the purchasing power of your assets ahead of inflation and provide protection from future market setbacks. In order to outpace inflation, your portfolio may also contain high-yielding investments like stock.

Consider Retirement Alternatives

Working part time through part of your retirement or delaying retirement even by a few years can dramatically change your retirement needs. Consider a 60-year-old worker with accumulated retirement assets of $411,440. Assume he is saving $24,000 per year with an estimated average investment return of 8 percent. Assuming his retirement income goal is $4,000 per month, with Social Security kicking in at age 65 ($1,640 per month) this is how he will fare:

If he retired at age 62, his assets would be depleted at age 77. If he retired a mere three years later at age 65, he would be covered until age 90. If he retired instead at 67, his assets would not deplete until he was 102 years old. A few additional years of working can make a big difference in providing coverage throughout your lifetime.

(This illustration is hypothetical and is not meant to represent any specific investment or to imply any guaranteed rate of return.)

Expect the Unexpected

A growing number of baby boomers say they'll retire after 65. But while more than half of current workers plan to work to age 65 or older, and 68 percent plan to work in retirement, the current average retiree actually retired at age 62, according to a recent study by the Employee Benefit Research Institute. About 37 percent of retirees said they left the work force earlier than planned, citing health problems or disability as the reason.

Polish Your Skills

According to Age Wave, a research firm that focuses on the graying work force, investing in your education, skills and other "human capital" by returning to school, volunteering and making contacts in your field before you retire can be worth more than what you have in the bank.

Larry Root is a certified financial planner and has been with Ameriprise Financial Services Inc. for 25 years. E-mail him at [e-mail].