Stephanie AuWerter
The best way to save for retirement is to diligently sock away dollars starting with your very first paycheck and stopping only once the champagne is served at your retirement party. Too bad it doesn't always work out that way.
On the road to a comfy retirement, many folks hit detours. Job loss, divorce, illness, disability — there are myriad reasons why distant goals like retirement are often put on hold, while more immediate ones, like paying the mortgage, take precedence. In fact, even without a catastrophic event, many family budgets are stretched so thin that saving for retirement is simply impossible.
Whatever the reason, many baby boomers are just now waking up to the fact that they are underfunded for retirement. Some 44% of Americans age 55 and older have saved less than $100,000, according to the Employee Benefit Research Institute's latest Retirement Confidence Survey. Only 13% have saved $250,000 or more. A rather ominous 30% either didn't know or refused to answer the question. For those who can rely on juicy pension benefits, $100,000 in savings might indeed last the rest of their lives; for those who aren't so lucky, $100,000 won't last long at all, even with Social Security benefits.
If you're fiftysomething and underfunded, it's time to take bold action. You must radically improve your savings strategy fast — and perhaps adjust your expectations for retirement. But don't worry. With a bit of determination and creativity, your retirement can still be comfortable. Here are some tips.
Catch Up With Catch-Up Contributions
No matter what your age, it's never too late to start saving — or to start saving more. Conventional wisdom holds that most folks should save at least 10% of their annual gross income. But those facing an underfunded retirement should try to save significantly more than that.
As an added incentive, Uncle Sam lets workers age 50 and older save more than younger employees. "Catch-up contributions," as they're called, allow older workers to contribute thousands more to their 401(k) and IRA each year.
In 2005, the maximum contribution limit for an IRA (Roth or traditional) is $4,000 for the general population, and $4,500 for those age 50 and older by year-end. You have until April 17, 2006 to make your IRA contribution for the 2005 tax year. To find out which IRA is best for you, click here.
With 401(k)s, the maximum contribution limit in 2005 for pre-tax employee contributions is $14,000 for most workers; for those age 50 and older by year-end, the figure is $18,000. To see the good effects that maxing out your 401(k) will have on your future retirement stash, click here. And for more on 401(k) contributions, click here.
Don't Retire
Postponing your retirement — even by a few years — can have a huge effect on your retirement finances, says CFP Guy Cumbie, principal of Fort Worth, Texas-based Cumbie Financial Advisors. Not only is each year an additional year to save — it's also one less year that you need to live off your retirement stash. (To see how a few more years of work could affect your retirement, check out our retirement worksheets.)
Fact is, many of today's workers won't retire until they're physically unable to work any longer — which very well might be in their 70s or 80s. But that doesn't mean they'll continue to work at the same job — or even in the same industry — that they toiled in during their prime breadwinning years. Many young retirees take part-time work, often working as a consultant in an industry they know well, or maybe even working in a low-stress service job, says Garrett.
Still others use retirement as an opportunity to reinvent themselves, pursuing a career dream not yet realized. For example, Garrett points to a 58-year-old acquaintance of hers who worked for years at a low-paying job. When faced with the reality that retirement would be financially unfeasible for many years, this woman chose to return to school for a two-year nursing degree — something she had always dreamed of doing. Now she's preparing to start a new career doing something she loves.
Relocate
A lot of folks are reluctant to move during retirement. But for those on a tight budget, it can have an enormous impact on their quality of life. "People say they don't want to leave their friends and family," says Garrett, but unless they want to move in with them, they might not have much of a choice. This is particularly true for those people who have significant equity in their homes — and little savings elsewhere.
While people who choose to relocate may talk about the lure of the palm trees and warmer climates, cold, hard economics is the most common reason why retirees choose to relocate, says David Savageau, author of "Retirement Places Rated." Moving from a high-cost area like Washington, D.C., San Francisco or Boston to one with a significantly lower cost of living can make the difference between a lean retirement and a quite comfortable one. "Why kill yourself in D.C. when you can live like a prince somewhere else?" he asks.
The key is to find a community with a robust economy, so jobs are plentiful for those who'd like to work, as well as an opportunity for an enjoyable lifestyle that includes nice scenery, access to cultural events and other retirees to socialize with, says Savageau. Some you may not have considered: Natchitoches, La., Silver City, N.M., and Murray, Ky.
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