Already, workers with pensions are retiring two years earlier than those with only 401(k) plans, according to a study by economists Leora Friedberg and Anthony Webb. The number of people working at ages 65 to 69 has been drifting higher for a decade and now stands at 25%.

Aside from the obvious problems with 401(k)s—demonstrated in the collapse of plans at Enron, Global Crossing and other once high-flying companies—there are seldom-discussed issues, including poor performance and what is known as leakage. The average 401(k) plan's equity holdings are concentrated in large-cap companies, so their returns track the S&P 500, which has dropped 44% from its peak. Over the long run, experts say, 401(k) returns lag behind professionally managed pension funds by 1 to 2 percentage points a year. And as if meager returns were not bad enough, when people change jobs, two-thirds peel off a slice of their 401(k) savings for current spending rather than roll the whole amount over into a new plan.

Pensions are guaranteed by the Federal Government up to about $43,000 a year. But health insurance is provided at the discretion of employers, who can hike premiums or scale back coverage whenever they want. More than 40% of firms offering self-funded health plans for retirees will reduce benefits this year, according to a study by Credit Suisse First Boston. That is far above the 25% that planned to reduce benefits a year earlier. Among companies with 200 or more workers, the proportion offering retiree health benefits fell from 41% in 1999 to 34% last year, according to a survey by the Kaiser Family Foundation, the Commonwealth Fund and the Health Research and Educational Trust. That's the lowest figure in five years.

Meanwhile, college costs are going up 6% a year; health-care costs 8%. Both far outstrip the expected 3% annual inflation rate over the next few years, and are taking a toll on boomers with college-age kids and dependent parents. What can they do? William Stern, 48, an optometrist in Shawano, Wis., has invested aggressively in stocks for 23 years. He recently shifted 20% of his assets to bonds. "I'm trying to reduce the risk in my portfolio," he says. He has also beefed up his savings rate, tucking away more than his goal of 20% of income when possible.

Ratcheting down risk by adding bonds to a portfolio—and saving more—is a great start, says Dean Knepper, a planner at Lifetime Financial Planning in Leesburg, Va. "Taking additional risk in an attempt to catch up," he says, "will not work if the individual becomes uncomfortable when the market is down and sells the investment." Knepper asks his clients to fill out a daily spending log. "They are often shocked at how that morning espresso and evening iced latte add up," he says, advising that if you cut $10 a day from spending, you can accumulate enough each year to make the maximum $3,500 annual contribution to an over-50 IRA.

For those who lost big in the bear market, it's time to rethink everything, says Ginger Applegarth, president of Applegarth Advisory Group in Winchester, Mass. "If you are retired, it might mean you have to sell the vacation home or go back to work or try to start a business." There are lots of services healthy retirees can offer, such as helping those who aren't so healthy by doing chores or working as a handyman or gardener. "Baby-boomer children would be happy to pay someone to shop for their parents or check on them regularly," she notes. Other options are working in day-care centers and substituting in schools. For boomers concerned that Mom and Dad's elder care is a looming time bomb, she says, this is a perfect time to have a heart-to-heart talk with them about their finances. "Just say, 'We've gotten whacked, and we're wondering how you are doing,'" she suggests.

Karen Petersen, a financial planner in Ames, Iowa, for American Express Financial Advisors, is counseling clients to build a portfolio that provides near-certain income through cash and fixed income that will not fluctuate with the stock market for the first three years of retirement. Beyond that, she helps them invest carefully in stocks so they can earn a long-term return that beats inflation. "I want to rebalance people's portfolios, but I don't want them to leave the stock market entirely," she says. The market may not rebound quickly, but it's sure to do well over the long haul. Even for people in their early 70s, today's advances in medicine and longevity mean that the long haul still applies.

—With reporting by Melissa August/Washington, Barbara Burgower-Hordern/Houston, Daren Fonda and Jyoti Thottam/New York, Laura Koss-Feder/Oceanside, Betsy Rubiner/Des Moines, Mary Sutter/Miami and Leslie Whitaker/Chicago

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