People are living longer, working to an older age and largely underestimating how much money they'll really need to afford the retirement they've always envisioned.

This stark reality, in turn, has compelled financial services firms to create and customize new investment products and portfolios this swelling population of retirees will need to help offset the costs of their longer and more expensive retirements.

It's also forcing their clients to make some hard choices based in reality and need at a much earlier stage in the retirement planning process, according to a new report released by Hearts & Wallets LLC, a retirement and savings research firm co-founded by Sway Research analyst Chris L. Brown and Laura Varas of Mast Hill Consulting.

"For most Americans, retirement is no longer 'smart' or achievable," Varas said in the report. "Of older Americans, 73% will work at least part-time as long as health permits. Firms need to tailor messaging and offer appropriate services and products."

Just last year a Hewitt Associates survey found that fewer than one in five Americans contribute to a defined contribution plan will have the cash and assets they'll need to support their expenses and desired lifestyle in retirement.

Financial advisors specializing in retirement planning and retirement income strategies are in high demand as are new or slightly modified income-generating investment products designed specifically for people who say they plan to work until they're deemed unemployable.

The retirement income market checked in at more than $3.3 trillion as of the end of 2010, roughly 11% of all household investable assets, and more than two-fold the amount invested in 2006. That number, according to the report, will eventually rise to between 25% and 30% by 2020 unless older workers just continue to work and never retire.

The survey of 20-plus large financial firms with more than $10 trillion in combined assets under administration found that three-quarters of these companies' budgets and management resources is focused exclusively on older investors.

"Developing retirement income solutions is vitally or very important at more than half of the firms participating in the research," Brown said. More than 80% report that retirement income has grown in importance over the last three years."

Brown said more than half of these financial services firms are planning to adjust fixed-income product lines and nearly as many said they're working to adjust their equity income products. Most expect immediate annuities to be widely available throughout the industry in the near future.

"Our data suggests more advisors are recommending annuitization and more plan sponsors are making immediate annuities available to participants," Brown said.