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Is it ever too late to build a nest egg?: Even those 55 and older with little savings should still put together a retirement plan, financial planners say

September 25, 2006

Many Americans are woefully unprepared for retirement, according to a recent study from the Employee Benefit Research Institute. The Washington, D.C.-based organization's latest Retirement Confidence Survey shows 44 percent of Americans age 55 and older have saved less than $100,000. Moreover, only 13 percent have saved at least $250,000, while 30 percent either didn't know or declined to answer the question. The statistics are hardly surprising to financial planners on the front lines of the battle to convince Americans they need to save more. But they say it's not too late to start.

"We never give up on saving," said Ron Hanson, a partner at Hanson & Snyder LLP in Carmel. "Delaying retirement for just one, two or three years can make a huge difference in accomplishing their retirement goals."

To be sure, millions of Americans are choosing to work longer, both full time and part time, as life expectancies increase and more money is needed to sustain a comfortable living. By working a few more years, people can postpone taking Social Security, which potentially means a higher payment.

Deferring retirement beyond age 63, the first year of Social Security eligibility, increases the payment roughly 7 percent each year until full retirement age, which is 66 for those born between 1943 and 1954.

From 2000 to 2010, the number of Americans between the ages of 55 and 64 will jump 47.2 percent, according to the Bureau of Labor Statistics. Factor in the uncertainty of Social Security and Medicare, not to mention less-thanrobust 401(k) plans, and the work force is starting to look a lot grayer.

But encouraging people to start saving, to avoid working well into their golden years, can be vexing, said Roel Carandang, an owner of locally based CS Capital Management Inc.

"Employees spend more time planning their vacation than they do their retirement," he said. "Less than 10 percent of people retiring today can actually afford to do so."

Despite the warnings, many still assume they'll be secure when the time comes to clock out for the final time.

In fact, 24 percent of survey respondents said they are "very confident" they will have enough money to retire comfortably, while 44 percent said they are "somewhat confident."

The total of 68 percent of current workers expressing some level of confidence about their retirement prospects was unchanged from a year ago. Yet the figures are a bit disturbing to the institute, given that several corporations within the past 12 months have ended or at least limited their traditional pension programs.

In response, President Bush signed legislation ensuring pensions are fully funded in the event a corporation goes bankrupt. But because fewer companies offer traditional pension plans, the federal government is giving the public more choices to plan for retirement.

The Pension Protection Act extends higher contributions for 401(k), IRA and Roth IRA plans and makes permanent catchup contributions for individuals age 50 or more. Perhaps the most significant piece of the legislation allows employers to automatically enroll workers in 401(k) accounts.

"This law is a giant hint that Americans need to take personal responsibility for saving for their retirement," said Grace Worley, president of locally based Worley Financial Group. "This says, 'Wake up; take some responsibility.'"

Experts say the best way to do that, especially if you're over 50, is to plow as much as possible into retirement accounts that provide a tax break. Both spouses can sock away $5,000 a year in IRA accounts, thanks to the new catchup contribution.

If you're older than 50 and have a 401(k), you can contribute $5,000 more per year than the limit for younger workers. The current limit for those over 50 is $20,000, but is set to receive cost-of-living increases until 2011.

Selling the old homestead and moving to cheaper digs sometimes can lead to further savings. Lowering the monthly house payment increases the amount that can be saved and reduces the amount of money withdrawn in retirement.

Still, nothing beats planning early, Hanson said. He often uses the following scenario to prove his point: If a 25-year-old starts a job earning $30,000 and defers 3 percent of his annual salary in a 401(k), with an employer match of 1.5 percent, the amount will total $4,050 after three years. Assuming the investment earns the average annual stock market return of 8 percent, the sum grows to $81,000 by the time the worker reaches 65.

"They're astounded when they hear that," Hanson said. "They're interested in buying a car. They don't even think about saving."

He cautioned against investing too aggressively in the stock market, however. The general rule of thumb for folks in their early to mid-60s is to keep 40 percent to 60 percent of their retirement savings in stocks and the rest in bonds.

The key is to assemble a diverse portfolio of stocks or stock funds without drooling over hot growth shares or buying into the latest craze. Too often, Hanson has seen clients fixate on a fund that outperformed the market the previous year but may lack similar expectations the next.

While financial planners make a living giving advice, it's never easy to be the bearer of bad news.

"I've sat in too many meetings where people come in and say they want to retire in a few years and you have to say it's not possible," Worley said. "It's always surprising to me that it's surprising to them."
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