SAVING FOR RETIREMENT


How to Retire Rich: 6 Smart Steps at Ages 50-66

At this point, retirement isn't a far-off goal you'll worry about someday when you're ready for your second hip replacement. Unless you plan to work until you drop, retirement is staring you in the face.

SEE ALSO: Jump-Start Your Retirement Plan Special Report

That means it's time to get deadly serious about saving, especially if you haven't saved enough. And that's true for most people: Nearly a third of Americans age 55 and older have saved less than $10,000 for retirement, according to the Employee Benefit Research Institute. Only 22% have saved $250,000 or more.

With any luck, though, these are still your prime earning years, and some of your major expenses -- such as a down payment on a home and college tui­tion -- are behind you. "With our clients, the last ten years that they work is when they save the most money," says Mark Bass, a certified financial planner in Lubbock, Tex. To make sure you're on track, don't hesitate to seek help from a financial planner or use the many resources available on the Internet.

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Take advantage of catch-up contributions. Once you're 50 or over, you can contribute thousands more to your 401(k) plan than your younger colleagues. For 2012, you can contribute an additional $5,500 over the annual limit of $17,000, for a total of $22,500. Any employer contribution on top of that is gravy.

Don't stop there. You can also make a $1,000 catch-up contribution to an IRA, for a total contribution of $6,000 in 2012. Unlike with a traditional IRA, you don't have to take annual minimum withdrawals from a Roth once you turn 70 1/2. There are, however, income limits on Roth contributions. You're eligible if your modified adjusted gross income is less than $125,000 ($183,000 if you're married and file jointly).

Dare to downsize. You may have hoped to move to smaller digs as soon as the kids were grown (and the boomerangers departed). But some homeowners who have seen the value of their homes decline in recent years are reluctant to sell until the real estate market rebounds, says Michael J. Nicolini, a certified financial planner in Elkhart, Ind. Even if your home hasn't returned to its former value, moving to a smaller home could save you thousands of dollars a year in taxes, utility costs and insurance. That's money you can funnel into retirement savings.

Consolidate your orphaned 401(k) plans. You've probably changed jobs several times, and you may still have money in former employers' 401(k) plans. Leaving money in a former employer's 401(k) plan isn't as bad as cashing it out. But as you approach retirement, it's a good idea to consolidate your savings in one IRA with a low-cost financial institution. You'll get a better handle on how much money you have and where it's invested. You'll also have more fund choices, and you may pay lower investment fees, Nicolini says. Once you start taking withdrawals, it will be easier to take them from your IRA than from a former employer's 401(k) plan.

Consider long-term-care insurance. A well-funded retirement savings plan could be decimated in a matter of months if you end up in a nursing home or require round-the-clock home health care. Medicare doesn't cover the cost of long-term care, and Medicaid isn't available until you've spent down most of your savings.

Long-term-care insurance could prevent this from happening, but make sure it fits your budget. You'll have to pay premiums for many years, and the cost of those premiums could increase mightily as insurers are confronted with the cost of providing long-term care to millions of aging baby-boomers, says Steve Robbins, a certified financial planner in St. Louis.

Bass says he typically starts talking to his clients about long-term-care insurance when they're in their early sixties. Instead of a policy that provides lifetime coverage from the day you enter a nursing home, he says, consider a policy that will cover a specific period, such as up to five years. (The average stay in a nursing home is two and a half years.) Adding a waiting period -- for example, 90 to 120 days -- will also lower your premiums. Look for a policy with an inflation rider so your coverage will keep pace with rising medical costs.

Weigh your Social Security options. You're eligible to file for Social Security benefits when you turn 62, but if you do, your monthly check will be reduced for the rest of your life. You may have little choice if you are out of work or in poor health and need the money to pay expenses. But if you have the wherewithal to work a few more years or have other sources of income, delaying checks until at least age 66 will increase your monthly benefits by 33% or more.

That's not the only way working longer could boost your payouts. Your benefits are based on your highest 35 years of earnings. If you're a highly paid employee, working longer could displace some of your lower-earning years.

Earlier this year, the Social Security Administration introduced an online tool that allows you to review your earnings record and get an estimate of your benefits. You should review this record annually, because unreported or underreported earnings could reduce your monthly payments. To get your online statement, go to www.ssa.gov/mystatement. (Also see Don't Gamble on Social Security, for information on a tool that helps you maximize your benefits.)

Reassess what you'll spend in retirement. Robbins recently met with a couple who earn more than $300,000 a year but who believed they'd need only $50,000 a year to live on when they stopped working. The couple, like most boomers, greatly underestimated how much they'll spend when they retire. While you may save on dry-cleaning and commuting costs, you'll still need to pay for groceries, utilities and gas.

If you refinanced to take cash out of your home, you may still have mortgage payments. And even after you're eligible for Medicare, you'll spend a lot of money on health care costs. Fidelity Investments estimates that the average 65-year-old couple will spend $240,000 on health care in retirement.

Still convinced you can live on less? Try living on your projected retirement income while you're still working. This exercise will force you to cut back on spending, which means you'll be able to save more. And at this point in your life, saving is one of the few things you can control. "As we often tell our clients," says Bass, "a good saver will beat a good investor every time."

Haven't yet filed for Social Security? Create a personalized strategy to maximize your lifetime income from Social Security. Order Kiplinger's Social Security Solutions today.

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