Ready, Set, Retire

You're at the top of your game, the peak of your career, and you're making more money than you've ever made. Now is the perfect time to think about quitting.

Say what? It's true. The five-to-ten-year period before you retire is the time to assess your retirement preparations to see whether they're realistic. And if you're falling shy of your goals, you still have time to make adjustments.

David Zeigler is living proof that preparation is key and the payoff is sweet. "Retirement is great," says Zeigler, 61, who spends his days playing tennis or ice hockey, volunteering with Meals on Wheels, catching up on his reading, and working on household projects at his home in McLean, Va.

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Zeigler retired earlier this year after nearly 44 years at the U.S. Department of Labor. But he started thinking seriously about making the break seven years ago, after he attended a four-day, government-sponsored seminar on retirement that covered everything from investments and health care to how to spend your extra time. "It was a catalyst for me," says Zeigler.

His wife, Melody Sands, expects to retire next year after 31 years as a federal-government employee. By then, their youngest son, Luc, will have graduated from college, and they'll be close to paying off their mortgage. Like many dual-career couples, Zeigler and Sands did not plan retirement as a simultaneous event. "I wanted David to have at least a year by himself," says Sands, 55. But she's eager to join him so they can travel and enjoy life without the daily grind. And with college bills behind them and two pensions, retiree health benefits, personal savings and a paid-off mortgage, they have a lot to look forward to. "This is the payoff," says Zeigler. "But if you're not financially prepared, you may not be nearly as happy."

The federal government has been offering retirement-transition seminars to employees for years. Now, corporate America is waking up to the fact that as workers shoulder more of the burden of providing for retirement, they need more help figuring out how to do it.

IBM, the venerable U.S. company once synonymous with career-to-grave employee benefits, is on the leading edge of this new trend. Times have changed, and so has Big Blue. In conjunction with its decision to freeze its traditional pension and cash-balance plans and move to a 401(k)-only strategy next year, IBM recently launched an innovative Money Smart educational program to help employees make the transition from work to retirement. The program offers comprehensive preretirement seminars, presented on site during business hours, that cover all the moving parts of a 21st-century retirement, including how to estimate future expenses and decide on an appropriate withdrawal strategy to make your savings last a lifetime.

Seminar leaders also discuss Social Security options and what to do about health coverage before Medicare kicks in at age 65. (IBM no longer guarantees health benefits for life, but it gives retirees an account based on their years of service after age 40 -- often worth $40,000 or more -- to pay for health insurance and other medical expenses. Once the money is gone, retirees are on their own.)

The seminar was an eye-opener for Bill Wiktor, 55, an IBM project manager in Rochester, Minn. "It made it clear to all employees that you have to take responsibility for your own retirement," says Wiktor. "You're not going to reach your goal unless you have a plan."

Wiktor is lucky. He has logged 30 years with IBM, so he'll qualify for a full pension. And he and his wife, Elaine Case, 52, a global marketing executive with IBM, have contributed the maximum to their 401(k) plans every year since the plans became available.

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An engineer by training, Wiktor is big on planning. He has already taken advantage of IBM's offer of free, one-on-one advice sessions with Fidelity Investment counselors. As a result, he has tweaked his investments to a slightly more conservative mix, now that he is three to seven years away from retiring. "If the market continues to do well, it will be sooner rather than later," he says. "If there's a significant downturn, it may affect our actual date."

Reduce your risk

Workers nearing retirement face a conundrum. You need to keep a large portion of your investments in stocks so that your portfolio continues to grow and can support you for as long as 30 years. But you also need to scale back risk because a major market drop just before or during your early retirement years could devastate your nest egg once you start taking withdrawals.

A well-diversified portfolio with 50% to 85% invested in stocks is a prudent course for most people who are five to ten years from retirement, says Michael Yoshikami, president of YCMNET Advisors, in Walnut Creek, Cal. Reducing your stock holdings and increasing your bond holdings will add stability to your portfolio, but your blended rate of return is likely to be lower. If you have a company pension or another source of guaranteed retirement income, you can afford to take more risk with your investments.

Yoshikami says the biggest mistake many pre-retirees make is not knowing when they've reached the finish line. "If you've accumulated the principal you need to produce an adequate income stream in retirement, reduce your risk level," he says. "At this point in your life, investing is all about managing risk and avoiding a train wreck, such as being fully invested in a bear market and riding it to the bottom."

If you are in your final decade on the job, you may be closer to your financial target than you realize. Michael Kitces, a financial planner with Pinnacle Advisory Group, in Columbia, Md., says that if your investments earn an average of 8% a year, your portfolio will double in value in nine years -- and even faster if your returns are higher. (To figure out how many years it will take to double your money, divide 72 by your rate of return. The result -- in this case, nine -- is the number of years it will take your principal to double.)

That projection doesn't include the money you continue to stash in retirement accounts. "A lot of people underestimate how steep the compounding curve is at the end," says Kitces.

Debbie and Karl Israelson are counting on the magic of compounding and continued 401(k) contributions to help them reach their goal of a $1.5-million nest egg. Debbie, 51, is a plant manager for Burton Lumber, in Salt Lake City. Karl, 54, is an operations manager for Boise's Building Materials Distribution division. They'd both like to scale back their management roles over the next few years but keep working full-time until they are 60 or 62.

Now in their final decade of work, the Israelsons recently took a serious look at their finances. Debbie increased her 401(k) contributions after the Principal Financial Group, which administers her retirement plan, sent a personalized statement explaining how much more she could accumulate if she took advantage of an extra $5,000 in "catch-up" contributions open to workers age 50 and older. She and Karl also met with a financial planner to make sure they are on track to meet their goal. They are.

Too busy to monitor her investments as she once did, Debbie decided to turn over her IRA to the adviser to invest in actively managed mutual funds. At work, she directs her 401(k) contributions to an all-in-one target-date retirement fund. Karl's 401(k) plan doesn't offer a target-date option, but his investments are well diversified; they include a smattering of international funds and real estate holdings as well as a portion in bond funds.

One of the Israelsons' big concerns is health care. Neither is eligible for retiree health benefits. Although they hope to retire before they qualify for Medicare at 65, one of them might have to keep working just for the benefits, Debbie says. "Health benefits are the biggest, scariest issue."

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The latest retiree health-cost survey by Fidelity Investments estimates that a 65-year-old couple retiring today without employer-provided health insurance will need about $215,000 over their lifetime to pay for medical expenses, including Medicare premiums, deductibles, supplemental insurance and prescription drugs. That estimate does not include long-term-care coverage.

50 is the magic number

Turning 50 is a logical milestone at which to take stock of your retirement situation, whether your target is five or 15 years away. That's when you can start making "catch-up" contributions to your 401(k) or other workplace-based retirement plan. This year, workers can contribute up to $15,500 to an employer-provided retirement plan. If you are 50 or older by the end of the year, you can kick in an extra $5,000, for a total of $20,500 in 2007.

And you don't have to stop there. You can also contribute up to $4,000 to an IRA (or $5,000 if you are 50 or older), even if you contribute to your employer's plan. Depending on your income, you might even be able to deduct your contribution to a traditional IRA or fund a Roth IRA, which offers no up-front tax deduction but provides tax-free income in retirement. Stay-at-home spouses can also contribute to an IRA.

Stay on the job

If you've started your countdown to retirement and discovered that your savings will fall short of your goal, here's good news: Time is on your side. The most important thing you can do to bolster your nest egg as you near the homestretch is work a little longer, says Christine Fahlund, senior financial planner for T. Rowe Price.

That advice may seem disappointing, but it doesn't have to be a downer. "Instead of delaying gratification, keep the gratification coming and just delay the retirement," says Fahlund. For example, rather than waiting for retirement to splurge on a long-awaited cruise, do it now. After a change of scenery, you might even find that, when you come back to work, your job's not so bad after all.

Nice thought. But how do you pay for the trip? Fahlund suggests that you scale back your retirement savings during your final years on the jobÐcontributing just enough to get the employer match -- and use the extra take-home pay to treat yourself. That may sound like heresy, but Fahlund explains that those last few years of 401(k) contributions don't have a huge impact on your bottom line because there's little time for them to compound before you start tapping your savings for income. The big-ticket impact comes from delaying the day when you start taking withdrawals, which reduces the total number of years you'll have to make your savings last.

Working longer not only provides an extra year or two of income and employer-provided benefits, it also reduces how much you need to save. Assuming you withdraw 4% of your nest egg in the first year of retirement -- a standard rule of thumb -- earning $20,000 a year at a part-time job is like having an extra $500,000 in retirement savings. "Working a little longer is a lot less painful than saying you have to save half of everything you earn in order to catch up," says Fahlund.

If you decide to work longer, you'll have lots of company. More than three-fourths of baby-boomers say they expect to work, at least part-time, during retirement, according to AARP. Now that the oldest boomers are 61, the trend is already apparent. Ten years ago, the typical U.S. worker retired at 60. Recently, the typical retirement age has risen to 62. Researchers at the Employee Benefit Research Institute speculate that the shift may be tied partly to the demise of traditional pensions and an increasing reliance on self-funded 401(k) plans.

Cut housing costs

Aside from your retirement savings, your house may be your biggest asset, and it can play a major role in your financial plan. Paying off your mortgage before you leave your job can significantly reduce your cash-flow needs in retirement. Or, selling your house and downsizing to something less expensive could leave you with more cash to invest.

Eric and Sandi Hakanson bought waterfront property in Boothbay, Maine, a few years ago with plans to build a retirement home someday. Then late last year, Sandi, who works as an educational consultant for Prentice Hall textbook publishers, was reassigned to Maine. She moved into a rental house last Christmas, leaving Eric to sell their home in Glastonbury, Conn. As a couple, the Hakansons can pocket up to $500,000 of home-sale profits tax-free, and that will go a long way toward building a mortgage-free dream home. (Individuals can shelter up to $250,000 of home-sale profits from taxes.) Downsizing to a smaller, more eco-friendly house should also help them save on housing costs.

It's the first time in their 32 years of marriage that the Hakansons have moved because of Sandi's job. All their previous relocations were linked to Eric's career with IBM, which employees used to joke stood for "I've been moved." But in today's decentralized business climate, it might as well stand for "I'm by myself" -- which is what Eric will be when he, too, starts working in Maine with his company's blessing. "We both plan to keep working on a full-time basis and go home to our vacation house every night," says Eric, 57.

He and Sandi, 56, recently participated in IBM's Money Smart retirement seminar. Thanks to his pension and company stock, and their combined savings, the Hakansons are looking forward to a comfortable retirement. "We've been planning this for 30 years, and we feel we're prepared," says Eric.