Late start on nest egg can still pay off

Eileen Ambrose -- Personal Finance

(Baltimore Sun graphic )
April 06, 2010|By Eileen Ambrose Personal finance

Maybe you meant to save for retirement after repaying your student loans. Then you had children, a mortgage and college tuition for your kids. Now, you're in your mid-50s without a penny for retirement.

Is it too late to build a nest egg?

Not only isn't it too late, but a serious saver could accumulate well over $400,000 in a decade, according to calculations by Baltimore's T. Rowe Price Associates.

"Don't give up hope," says Christine Fahlund, Price's senior financial planner. "It's still something you can accomplish if you get out there and get going."

The earlier you start saving for retirement the better, of course. Even small amounts over many years can add up to a healthy pot of money without crimping your lifestyle. But in reality, many workers get a late start and some don't set aside dollars - even though they have the money to do so.

An annual survey by the Employee Benefit Research Institute recently found that 29 percent of those age 55 and older had less than $10,000 saved for retirement, excluding houses and pensions.

The longer workers put off saving for retirement, the more overwhelming it can seem. So much so, planners say, that some workers might never get started.

That's why Price ran the numbers. By saving in a 401(k) at work, Price says, you can salt away a tidy sum in a decade.

Price ran scenarios for an individual making $80,000 and getting a 3 percent raise annually. It assumes an annual return of 8 percent.

A worker who saves 6 percent of pay per year - usually the minimum to get a 3 percent employer match in a 401(k) - would end up with $147,340 at the end of 10 years.

But what if a worker maxes out contributions, each year putting in $16,500 plus a $5,500 catch-up contribution permitted for those 50 and older? That's an ambitious 27.5 percent of pay initially. This worker would accumulate $444,610 over a decade.

Is that enough for retirement? That depends on your lifestyle.

But if you took the $444,610 and purchased an annuity that started immediately to pay out benefits, you would receive $2,705 a month for life, according to And if you start taking Social Security the next year at your normal retirement age - 66 and two months - your monthly benefit would be $2,053, according to the agency's online calculator. That's a total of $57,096 a year. (Social Security also is adjusted annually for inflation.)

Putting away that much may seem impossible, but retirement experts say it may be more doable than you think.

Fifty-five-year-olds who no longer are paying college tuition for kids or who have paid off mortgages can find thousands of extra dollars to tuck away without changing their lifestyle, says Dallas Salisbury, president of the Employee Benefit Research Institute.

Or, if the kids are no longer living at home, parents could save money by selling their house and moving into a smaller place, he says.

Salisbury, 61, says he and his wife managed to save 40 percent of their after-tax income last year largely by paying off their mortgage. "All the money we used to pay for the mortgage goes straight into savings," he says.

Kirk Kinder, a financial planner in Bel Air, advises looking at insurance, utilities and entertainment expenses for ways to cut costs and free up money for savings.

Many people still carry low deductibles on insurance policies, which raises the cost of their premiums, Kinder says. Or, they might be paying steep monthly fees for cable TV or cell phone packages they don't fully use. Also, he points out, "A lot of people spend a lot of money eating out." Americans haven't been big savers, but retirement experts say the recession and the 2008 stock market crash appear to have changed that.

"They now realize they are going to have to do this," Fahlund says.

Salisbury agrees, saying more workers are financing retirement by staying on the job longer. In 1993, roughly 20 percent of people ages 65 to 70 remained in the work force, he says. In 2008, that figure rose to 34 percent.

"People have become more realistic. And that's a good thing," Salisbury says.

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