The Gallaghers' Plan

Allyson, 23, a recent graduate, owes $20,000, which she is paying off herself. She earns a good living monitoring vendor compliance—keeping merchandisers on track —for the Walt Disney Company in Florida. "She just bought her own home," her mother says proudly. Still, Judy would love to pay Allyson's loans for her.

Nineteen-year-old Kelsey's situation raises more concern. She and her mother put together an impressive package of grants, part-time work, and government loans to help cover her first year's $32,000 in expenses at Philadelphia University. Still, it wasn't quite enough, and her mother took a $10,000 federal loan at 8.5 percent interest. She expects to do the same for the next three years. The monthly cost of the initial 10-year loan is $120.

The Plan

Save like crazy

Put off retirement

Avoid paying for college

Think about later care

Gallagher's savings aren't nearly enough to allow her to retire at 62 and live as comfortably as she wants to, warns financial planner Derek Kennedy of Kennedy Wealth Management in Knoxville, Tenn., and Cincinnati. At her present rate of savings, says Kennedy, "Judy's non-pension assets will run out by the time she's 72, leaving her dependent on the declining value of her pensions." If she runs low on money, she will need to downscale her life, turn to her kids for support, or both—not a welcome thought for an independent woman. But there's much she can do to change the path she's on.

Save a Lot More

Fortunately, Gallagher still has the time and means to transform her retirement prospects. "A satisfying retirement is within Judy's reach, but she has to make the effort," says Kennedy. "To fund the kind of retirement she wants, she really needs to step up the pace."

He recommends that she start saving $12,600 a year—almost a quarter of her income. It may be a startling recommendation, but the planner insists it's a realistic one. "We're not talking about deprivation, we're talking about reordering your choices," he says. "When you make financial security your top priority, it gets easier to save because other needs just move further down the list."

To get started, Kennedy suggests Gallagher keep track of all expenditures, no matter how small, over a one-month period. "Then mull over each one and decide whether you value it more than you value peace of mind about your future."

Once the new budget starts producing extra cash, Kennedy recommends Gallagher make the $6,000 maximum yearly contribution to a Roth IRA and put the rest into her 403(b) account at work. Gallagher's current investment portfolio holds a very conservative mix of 36 percent stocks, 47 percent bonds, and 17 percent cash. To increase her potential for higher returns, Kennedy suggests a portfolio that's 63 percent stocks and about 7 percent REITS (real estate investment trusts, a kind of mutual fund), with the remainder in bonds and cash.

Work Longer

Based on her family history, Gallagher is understandably reluctant to postpone retirement too long. However, says Kennedy, she needs to weigh that concern against the near certainty that, even with stepped-up savings, she will not have accumulated enough money by age 62 to keep supporting the lifestyle she wants, especially if she has to buy health insurance. Kennedy calculates that, if she saves as much as he recommends but still chooses not to work past 62, all her savings will be gone by her early 80s.

To prolong her financial security, the planner recommends that Gallagher continue full-time work and saving until age 66, when she'll be eligible for full retirement benefits from Social Security. "That will allow her to build her assets, increase her pensions, plus get her covered by Medicare."

At that point, Kennedy suggests, she could retire from full-time work and take a job for $12,000 a year or so at something she enjoys—like a bookstore, since she loves to read—to avoid tapping her savings until age 70, when she can quit work for good. Under this scenario Gallagher's portfolio should be worth close to $500,000, enough to support her retirement expectations into her 90s, he says.