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15 years from retirement -- No joke: It's time to pay off debts and save

In 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 less expenses."

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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 cards first.

"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 head.

"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.

Budgeting
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" to spend.

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 more.

"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.

Saving
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.

Insurance
At this stage, review life insurance and decide whether it is necessary.

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 be enough."

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.

 
-- Updated: Feb. 20, 2003
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See Also
Part 1: Twentysomething retirement planning
Part 2:
25 years to go - Kick savings into high gear
Part 4:
Approaching retirement?
First, retire your debts
Financial advice for the 50s

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