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Carl Lewis was known for it. Joe Montana wowed huge crowds with his. Seabiscuit is still regarded as having one of the best. A strong finish earns athletes--human and animal alike--much fanfare and enduring fame. For investors, a strong-willed drive to bolster savings in the retirement homestretch can reap rewards, too.
If saving for retirement is more like a marathon than a sprint, then the 50's are generally regarded as the beginning of the final leg. The remaining five, 10, or 15 or more years leave plenty of time to make contributions that can significantly affect the size of your nest egg and, as a result, your quality of life in retirement.
For some, the need to increase savings during their 50s is particularly pressing. According to analysis done last year by the Congressional Budget Office, a quarter of baby boomer households had saved little or nothing for retirement. That said, Ric Edelman, a Fairfax, Va.-based financial adviser who holds six professional designations, calls for cool heads. "Don't lament the fact that you should have started saving sooner," he says. "Get started now. The sooner you start, the better off you're going to be." Here's some more encouragement: The so-called catch-up provisions enacted by Congress in 2001 allow people over age 50 to put additional money into tax-advantaged investments.
Even those who feel comfortable with their planning can benefit from ramping up their preretirement savings, because it may mean the difference between retiring earlier or later. So, as you prepare for your own retirement homestretch, here are some tips to help you finish strong.
Finding money to save
Locating extra cash to devote to retirement can be daunting. Many people figure that their family budget is airtight, with every penny devoted to a necessary expense. The only way to discover whether that's indeed true is to meticulously record every dime you spend in a month. This complete inventory of expenditures is often a great revelation. One of the classic examples financial professionals like to cite is the daily trip to the coffee shop. Although it seems like an innocent indulgence, when you do the math, it can add up to a missed opportunity for saving. Indeed, forsaking the $3-a-day latte translates into an additional $780 per year in retirement savings.
There are plenty of other, sometimes less obvious, areas that may offer opportunities for saving. Walter Woerheide, a professor of investments at The American College, a Pennsylvania-based school that offers graduate and continuing education in the financial services field, says holding onto the family car for a few extra years can generate much-needed money. "You may have to give up buying a new car to actually have a car in retirement," Woerheide says. Take a good look at credit card debt, as well. If you have multiple cards, consider consolidating the balances onto one card and negotiating a lower interest rate. If you took out a mortgage on your house at a time when interest rates were high, you might want to consider refinancing. Depending on the size of your mortgage, refinancing can free up $100 or more per month to put toward retirement.
Scrutinizing your budget is one approach. Ellen Hoffman, author of The Retirement Catch-Up Guide, suggests another: reordering your priorities. Allocating a percentage of your salary to savings forces you to make the necessary adjustments to meet that goal. It's akin to having an automatic deduction for federal income taxes. "If you never have the money, you don't miss it," she says.
Not to be overlooked are tax-advantaged accounts, such as your 401(k). By boosting contributions, you can substantially lower your tax bills right now. For example, someone earning $50,000 a year who bumps up his or her annual 401(k) contribution from $5,000 to $10,000 will reduce his or her tax bill by $1,650 (assuming a combined 33% federal and state tax rate).
More saving strategies
According to Hoffman, the most underutilized retirement asset most people have is their home. Often, couples in their 50s and 60s continue living in a house that, although high in sentimental value, is too big and too expensive for them, requiring high-cost upkeep and large utility bills. To Hoffman, the saving opportunities that come with downsizing can be compelling, particularly if it means moving from a high-priced real estate market to a more affordable area.
She gives the example of a couple who sell their $300,000 family home and move to a smaller house costing $200,000. Not only does this transition allow them to potentially buy their new house outright--and save on maintenance, utilities, and property taxes--it also gives them a substantial amount to devote to retirement savings and can be used for further retirement investment. "The money you have generated from the sale of your house may also leave you with a chunk of cash that you can stash away for retirement," Hoffman says. Working a few years longer than you might have planned can also have big advantages. It can potentially boost your Social Security and pension income, and reduce the number of years you'll be drawing on retirement income. Keep in mind, investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.
Demographic trends are promising for people who decide they either want or need to continue working. As more baby boomers leave the job market, companies are going to be scrambling to find replacements from the less-populous next generations. This puts those approaching retirement in a strong position to negotiate shorter, more flexible hours or even freelance or consultancy positions with their old employers.
Reaping the rewards
John McBaine is a good example of how diligent retirement saving can pay off. An employee for 37 years at General Motors in Michigan, McBaine was a committed saver almost from the time he joined the company straight out of high school. Naturally curious as a teenager, he read books on the stock market and made an effort to meet stockbrokers who lived in the area. His self-education program led him to participate early in GM's stock savings plan, which allowed him to invest 10% of his salary and get a generous company match that, at times, was equal to 80% of what he contributed.
When he could see that the money was growing quickly, it was all the motivation he needed to save even more. "It gave me further encouragement and affirmed that this was the right thing to do," he says. When GM began its 401(k) program, McBaine maxed out his contributions whenever possible. He did the same with traditional IRAs, Roth IRAs, and other investments. He never missed the money. "Once I made the commitment to contribute and learned to live on my take-home pay," he says, "it got to be pretty painless." And well worth it: McBaine retired in 1999, at age 54.
Today, he's enjoying his beachfront home in Indian Shores, Fla. He's the treasurer of his condo association, where he manages a yearly budget of nearly $300,000. He makes it out to the golf course a couple of times a week, plays softball when he can, and has recently become a member of his town's planning and zoning commission. The activity and freedom to do things that interest him are all he hoped retirement would be. "Some people were born to be retired," he says. "I think I fall into that category."*
Regardless of your past saving habits, the homestretch to retirement is your big opportunity to see if your own finishing kick is as strong as the one that made Seabiscuit famous.
By Chris Warren
* The experience of this investor may not be representative of the experiences of all investors.
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