Retirement catch-up: Strategies for late savers

by Center for Personal Finance editors

ATLANTA, Ga. (7/3/06)--Millions of people older than 40 are in the same boat--wishing they had started saving for retirement one, two, or even three decades ago. The advice from professionals: It's not too late to start, but you'd better act fast (CNNMoney.com June 22).

One strategy you should not count on, though, is plugging the holes with an inheritance (USA Today June 27). A recent study by AARP revealed that, as of 2004, only about 19% of baby boomers had received an inheritance. Adjusted for inflation, the median amount for those who did receive one was $49,000--not enough to fall back on given longer life spans and skyrocketing health-care costs.

If you feel financially unprepared for retirement, take steps--now--to close the gap between what you have and what you need:

Every little bit helps. Stashing the equivalent of $10 a day in a 401(k) will boost savings by more than $100,000 over 15 years, assuming an 8% return.

Bump up with the catch-up. For workers 50 and older, your maximum contribution to 401(k)s is increased to $20,000 a year, and for Individual Retirement Accounts (IRAs) in 2006, it's $5,000.

Go with the immediate tax break. If you're eligible, choose a deductible IRA rather than a Roth IRA if you're behind on retirement saving, because your tax bracket probably will be lower in retirement than it is now.

Draw up a budget. Figure out which categories to cut back on and identify spending leaks. Rethink large expenditures such as college tuition for the kids--it may be necessary for them to borrow the funds.

Invest for the long haul. Even if you're 50, your investment time horizon isn't just the years until retirement--it's nearly four more decades. This means most 50-year-olds should consider keeping 60% to 80% of their investments in diversified stock funds. Balance that with some cash and bond funds to absorb a hit from a severe bear market.

Downsize your dwelling. After the kids are gone, you'll free up funds to invest if you trade in that four-bedroom house for a smaller one in a less expensive neighborhood.

Work a few more years. This postpones withdrawals from your retirement accounts, gives your savings more time to grow, and takes the pressure off finding more money to save. Although early retirement sounds nice, delaying Social Security payments until at least full retirement age could increase the size of your monthly benefit by more than 30%.

For more information, read "How Long Will Retirement Savings Last?" in the Home & Family Finance Resource Center retirement section.