Retirement Savings Strategies for Late Starters

How to prepare for retirement beginning after age 50.

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Most people aren't putting nearly enough into their retirement accounts to fund a secure retirement. The median value of retirement accounts, including IRAs and 401(k)'s, for workers between ages 65 and 74 in 2007 was $77,000, according to the Federal Reserve's survey of consumer finances. What's more, 42 percent of workers age 45 and older have total savings and investments of less than $25,000, according to a recent Employee Benefit Research Institute survey. Still, you may not need to delay retirement indefinitely if you have saved practically nothing for retirement in your 50s. Although far from painless, it's still possible for late starters to save enough for a reasonably comfortable retirement. Here are some strategies to ramp up your retirement readiness:

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Become a super saver. It's feasible to accumulate a large 401(k) balance within a decade if you do some serious saving. For example, a 55-year-old who has no retirement savings and earns $80,000 a year could accumulate $444,610 by age 65, according to recent T. Rowe Price calculations. To achieve these results this retirement saver would have to save 27.5 percent of pay each year, earn a 3 percent annual raise, collect a 3 percent employer match, and reap 8 percent compounded annual returns. "There is hope and there are ways to do this," says Christine Fahlund, a T. Rowe Price senior financial planner. "You are going to need to cut back on your current lifestyle and continue to do that in retirement."

Take advantage of tax incentives. Workers age 50 and older can contribute up to $22,000 to a 401(k) in 2010, $5,500 more than younger workers. Older workers within certain income limits can also contribute up to $6,000 to an IRA, Roth IRA, or a combination of the two this year. Traditional retirement accounts allow you to avoid taxes on contributions in the years you're saving, but you must pay tax on withdrawals in retirement. Roth accounts don't provide immediate tax benefits, but withdrawals in retirement from accounts at least five years old are tax free.

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Consider delaying retirement. You can get by saving less each year if you're willing to delay retirement. Consider a couple, both age 50, currently earning $75,000 annually who estimates they will need $55,000 worth of income each year in retirement. They will receive $35,000 annually from Social Security, but will need to come up with the other $20,000 annually on their own. To reach that retirement income goal, the couple will need to save 18 percent of their income until age 70, or about $13,500 annually, according to calculations by Chris Long, a certified financial planner for Long & Associates in Chicago. However, if the couple is willing to delay retirement until age 75, they could achieve the same retirement income by saving 12 percent of their income annually, or about $9,000 each year. His calculations assume an 8 percent rate of return and 3 percent inflation. "The longer you wait to start saving, the amount you need to save to be able to retire at all increases tremendously," Long says. "You will need to save a lot more because you don't have as much time to compound the growth."

Maximize Social Security benefits. You don't need to save enough to finance retirement entirely on your own. Social Security benefits provide a base for your saving to build upon. Get an estimate of your future Social Security income at ssa.gov. Also, consider delaying the age you sign up for Social Security benefits. Social Security payouts increase for each year of delay between ages 62 and 70. A $750 monthly check at age 62 could be boosted to $1,320 by waiting until age 70 to claim your due.

Downsize retirement expenses. Another way to make up for a lack of savings is to downsize your retirement expenses. Paying off a mortgage before retirement can significantly cut your housing costs. Some retirees also downsize into smaller homes or condos and pocket the extra cash, curb or sell one of their cars, or employ other frugal strategies to significantly decrease their cost of living in retirement. But watch out for new expenses in retirement including travel, leisure activities, and increasing health care costs as you age.