15 years from retirement
-- No joke: It's time to pay off debts and save
his comedy routine in the 1970s, Steve Martin mimicked a slick pitchman
who would tell you how to become a millionaire and never pay taxes.
"First, make a million dollars," the spiel
began. "Next . . . "
The final 15 years before retirement can be just as
simple -- and just as difficult -- as that comic sales pitch. The
run-up to retirement basically goes like this:
- First, get rid of most of your debt.
- Next, figure out how much money you'll want to
spend in retirement.
- Save enough to provide that income.
- Protect your plans with the right kinds of insurance.
Simple in theory, difficult in practice.
"By this age, many people have paid off their
home, or are close to it, and the kids are on their own," says
Carolyn Lipowitz, a certified financial planner from San Francisco.
"You can take sort of a breather now to make sure things are
in order but don't be tempted to overindulge just because you have
Getting rid of debt
Fiftysomethings fall into two camps: those who can kick up their
heels and reap the benefits of years of saving and investing, and
those who need to shift their retirement savings plan into high
gear -- pronto.
For folks looking to jump-start saving for the golden
years, the first step should be dumping any credit card debt. Because
credit-card interest is so high, it makes sense to pay down those
"The last thing you need in your 50s is to get
yourself in debt because that's the time you want to sock it all
away for retirement," says Marilyn Steinmetz, a certified financial
planner in West Hartford, Conn.
After that, the key is figuring out ways to eliminate
as much housing debt as possible. Keep in mind that having an equity
loan or line of credit won't necessarily leave you eating franks
and beans at 80.
"A lot of people think they should have their
home paid for by the time they retire and I think that's an admirable
goal," says Carol Nowka, a certified financial planner with
Nowka/Grimes Financial Inc. in Grand Island, Neb. "It gives
you the sense of confidence that at least you have a roof over your
"But as far as trying to pay down quickly, I
wouldn't do that necessarily because you can probably get a better
rate of return" by investing elsewhere, she says.
How can somebody juggle all these issues and still come out ahead?
Try looking at the last decade and a half of work as a countdown;
at zero, most counselors recommend that any housing debt be either
completely paid off or almost so. A borrower with only one long-term
mortgage, such as a 30-year fixed loan, might be able to accomplish
that by refinancing the debt into a 15-year mortgage. Because lenders
offer equity loans with 15-year payment schedules, even people who
need help covering college costs can stay out of trouble.
It's time to get serious about estimating how much money you'll
want to spend in retirement.
That's "want" to spend. Not "need"
You can get by on very little if you refrain from
dining out, making long-distance phone calls, taking trips or buying
nice presents for the grandchildren. You don't need to do any of
those things, but you probably will want to, so budget accordingly.
Michael Nieswiadomy, an economics professor at the
University of North Texas, says most retirees spend less on clothing
and gasoline because those expenses are employment-related. "After
that, everything's a choice as far as what you choose to live on
and ultimately how long your assets last," says Nieswiadomy,
who co-wrote a book on the subject, Expenditures
of Older Americans.
The rule of thumb is that a retiree's expenses tend
to be 70 percent to 80 percent of pre-retirement expenses. Experts
say that's mostly because income tends to be 70 percent to 80 percent
of pre-retirement income. If retirees had more, they would spend
"To an awfully large extent, what people spend
depends on how much they can afford," says H.K. Hebeler, a
retired Boeing Aerospace executive whose Web site, Analyze
Now, offers retirement planning advice and tools, some free
and some for a fee. He is especially proud of Retire99, an Excel
spreadsheet that he developed which analyzes just about every retirement
scenario he can think of.
Hebeler says he used to think you could estimate your
retirement spending accurately by drawing up a detailed budget.
But that's just the start, he says, because, "When you're 55
or 65 you can't really see what it's going to be like when you're
75 or 85."
He can tell you this much: When you're in your 70s
or 80s, your medical expenses are likely to be higher than you think
they will be. Pharmaceutical companies continue to formulate new
drugs, such as Viagra and arthritis-fighter Celebrex, that dramatically
improve quality of life. That's the good news. The bad news is that
Medicare doesn't pay for outpatient prescriptions, so you have to
pay out of pocket or with private Medigap insurance policies.
Hebeler advises people to draw up a detailed retirement
budget and then add a couple of costly scenarios: taking two trips
annually to see each child, medical problems, a water heater that
needs to be replaced. Remember that cars and houses need maintenance
and occasional expensive repairs. Hebeler recommends setting aside
at least a year's worth of living expenses as a contingency fund.
Because a comfortable retirement can be so expensive,
Hebeler says it's usually a mistake to retire before age 62. Those
who retire at, say, age 55, often end up taking part-time jobs with
no benefits just to keep up with expenses, he says.
Once you have estimated how much you'll spend in retirement,
you can estimate how much you need to save. Ideally, significant
contributions have been made to 401(k) plans, pensions and other
retirement accounts, so now you can fill in any holes.
"This is the time to maybe slow down on aggressive
investments and possible turn your saving strategies toward a more
conservative path," says Ron Meier, a professor at the College
for Financial Planning in Greenwood Village, Colo.
Those in their 50s might want to put some money into
bank products such as certificates of deposit and money market funds
to avoid the bumps and valleys of the stock market.
One savings option is the retirement CD. This type
of product defers all taxes on the interest earned by the account
until withdrawals are made, usually in retirement.
At this stage, review life insurance and decide whether it is
As you get closer to your retirement years, "the
purpose of life insurance changes dramatically," says Randall
Guttery, assistant professor of finance at the University of North
Texas. Where it once was intended to replace your earnings, it now
becomes a tool for estate planning. At this point, the issues become
complex and it's time to find a good financial planner.
Harold Skipper Jr., professor of risk management and
insurance at Georgia State University, says, "The underlying
question at every age is, 'Will my death create significant financial
hardships for people I care about?' If the answer to that question
is no, either because it wouldn't create a hardship or you don't
care about them, you probably don't need to buy life insurance."
There are a couple of other kinds of policies to consider
getting: long-term care insurance and disability income coverage.
In an ideal world, Skipper says, you would have bought
long-term care insurance before you were in your 50s or 60s, but
few people do. Long-term care insurance helps to pay the cost of
long-term nursing, rehabilitative and day-care services at home,
in a community center or at a nursing home. That kind of care is
expensive and Medicare doesn't cover it. Ironically, poor people
probably don't need it because Medicaid would pay for such care.
Wealthy people might have enough to pay for long-term care.
"So, perversely, it probably is true that middle-America
people, the middle income people, are the ones who might have the
strongest need for long-term care insurance," Skipper says.
The pricing of long-term care insurance is an inexact
science, so shop around.
People in their prime earning years need adequate
disability insurance, Skipper says. Such a policy replaces your
salary or wages if you are disabled before retirement and can't
work. You'll have trouble saving for retirement if you're disabled
and can't get a job -- and you're more likely to suffer a disability
than die before your retirement years.
"Disability is probably the most undersold, most-needed
insurance coverage there is," Skipper says. "I think agents
don't push it, people don't think about disability, and people assume
that their employer's disability coverage and Social Security will
You can check with your employer about disability
coverage. The Social Security Administration's Web
site explains its disability benefits.
There are several types of disability insurance. Some
cover disability caused by accidents, and some cover disability
caused by disease and accidents. As with life insurance, it pays
to seek advice from more than one agent and to research disability
insurance on the Internet.
Michael D. Larson, Lucy Lazarony
and Michelle Samaad contributed to this story.