Late Retirement Savers: Time's Still on Your Side

By: National Endownment for Financial Education | Source: AARP.org | April 1, 2005

By the National Endowment for Financial Education

Life can throw you lots of curve balls. So if you're age 50+ and just starting to think about saving for retirement, you still have time to get in the game. Good savings habits apply just as much now as they did earlier in life. It's never too late to get ready for retirement. It's only too late if you don't save at all.

Even if you're only a few years away from your last day of work, every little bit that you can save counts. The following steps will get you off the bench and onto the playing field.

Set Goals and Estimate Your Expenses

First, decide how much money you'll need to live the retirement lifestyle you want. With good health, your retirement could last 30 years or more.

Ask yourself these questions: How much money will you need to pay bills in retirement? Do you want to travel? What's the cost of living where you plan to live? Will your mortgage be paid off? Once in retirement, you'll likely still have major responsibilities, such as medical and household expenses. What other debts do you need to think about? If you can, lighten your financial load by paying off credit card bills and loans now.

Your answers to these questions are important. They will help you decide how much money you'll need for the type of retirement lifestyle you want. By knowing how much money you can count on and how much you expect to spend, you can decide how much you need to save. Being honest with yourself about the value of your current assets and future retirement costs is critical to the retirement planning process. Financial experts typically say you'll need at least 70 percent of your pre-retirement income to live comfortably in retirement.

Understand Your Resources

Make a checklist of all of the sources of income you can count on. These may include:

• Social Security
• 401(k), 403(b), or 457 accounts
• Traditional and Roth Individual Retirement Accounts (IRAs)
• Savings and investments
• Inheritance
• Employment
• Home equity and/or rental property
• Other income

There are several ways for you to make up for lost time while going after your retirement savings goals.

Retirement Plan Options

A good place to start is to contribute more each year to your employer-sponsored retirement plan, such as a 401(k), 403(b), or 457 plan. Put as much money as you can into these tax-deferred accounts. This is especially true if your employer makes matching contributions because this is "free" money that you pass up by not participating. The pre-tax contribution limits for these types of plans will increase over the next few years:

Traditional IRAs allow you to add to retirement savings and put off paying income taxes on what you contribute plus the accumulated earnings until you withdraw the money.

Roth IRAs also provide an opportunity to save for retirement, but with a different kind of benefit. While you do not receive a current year tax deduction for these contributions, all contributions and earnings are income tax free when you withdraw them. This holds true as long as you have had the account for at least five years and are at least 59-1/2 years old when you begin making withdrawals. You can only contribute to a Roth IRA if your income is below a certain amount. Annual contribution limits for Roth IRAs are the same as for a traditional IRA.

These contribution limits also increase each year for the next several years:

Finally, many people are self-employed or work for themselves in addition to their regular job. They have several tax-deferred options from which to choose, including SEP-IRA, SIMPLE-IRA, and Keogh.

Play "Catch-Up"

Investors 50 and older can build their savings even quicker through "catch-up" contributions to IRAs and employer-sponsored retirement plans. In addition to the contribution limits listed above for these types of plans, workers age 50 or older can make additional contributions.

Get in the Game Now

Money you save now has the greatest chance to grow until you're ready to use it. It may be hard to jump from not saving at all to setting aside large amounts of money. But by starting small and building your savings over time, you're making a good first step toward reaching your retirement goals. Here are some helpful tips:

• Start saving money on your own and earmark this money for your retirement. Don't use it for anything else unless you absolutely have to.
• Make retirement savings your top priority. Budget for it just like you do your mortgage or other expenses.
• Have money automatically deducted from your paycheck into a retirement savings account. If you don't see it, you won't miss it.
• Don't be too conservative in your investment strategy. Consider investing in diversified stock mutual funds to lower your risks and boost your returns. Many fund companies have a low opening balance requirement and allow automatic deposits on a regular basis to build your savings. But be sure to do your research and select mutual funds with low fees and experienced managers. After all, the older you are the less time you have to recover any losses.
• By saving all you can now, you'll reap the rewards of compound interest. Compound interest is "interest earning interest." In other words, interest is paid on the original amount you save plus the interest you earn along the way. For example, say you put $1000 in an account that earns 5 percent interest. Thanks to the magic of compound interest, in 10 years your investment will be worth $1,628.
• Look into the equity you've built in your home. You could move to a less expensive area if you want to downsize during retirement. If you sell your home, you may be able to pay off your mortgage – maybe even invest a significant portion of the monies you receive. If you consider this option, make sure to include the difference in expenditures of the two living arrangements (utilities, property and other taxes, transportation, for example).

It's not too late to get in the game and start saving. Do your homework and become a "wise investor."

This column is meant to provide general financial information; it is not meant to substitute for, or to supersede, professional or legal advice.

Note: The content areas in this material are believed to be current as of this printing, but, over time, legislative and regulatory changes, as well as new developments, may date this material.

©2005 National Endowment for Financial Education. All rights reserved.