Approaching retirement? First, retire your debts
By Michael D. Larson • Bankrate.com

They may be called the golden years, but soon-to-be retirees who don't get their financial affairs in order before signing off may find the only gold around is in the plating on their 25-years-of-service watches.

As the countdown to retirement enters its final few years, experts say, they should be getting rid of debt, paying off home loans, looking at insurance options and figuring out realistic budgets that will allow them to live well without depleting their savings completely. It may sound like a tall order, but it's the best way people can make sure their post-work lives are more rewarding than the jobs they left behind.

"Retirement isn't what it used to be," says Ross Levin, editor-in-chief of the Chicago-based Journal of Retirement Planning. "People are living longer. They aren't necessarily working for the same companies forever. They don't have that pension plan and they're more dependent on their own savings."

The key, he adds, is for people to find a balance between what they want and what they can afford to have.

"Clients are looking for ways to feel fulfilled when they retire," Levin says. "But the two biggest mistakes we see in financial planning come from clients that spend too much and clients that save too much."

Pay off remaining debt
The best way to end up right in the middle is to start thinking about debt first. Most seniors don't need that albatross hanging around their necks after retirement. Credit card balances require monthly payments, for instance, and those become tougher to make when Fridays no longer bring paychecks with them.

"Pay it off and figure out where the credit card debt came from because if you retire and build up credit card debt, you're a dead duck," says Meg Green, a certified financial planner based in Miami. "To retire with a bunch of debt -- you won't be able to sleep at night. It's not fun." To figure out how long it will take to erase your credit card debt, use Bankrate's credit card calculator. For a fast and effective plan to pay off debt quickly, read about the payment push strategy.

Consider using savings to wipe away most or all of the debt as soon as possible, provided doing so won't mean living off bread and water at 70. Once that's done, feel free to charge -- as long as the balances don't start creeping back up again. That way, you can get air miles and other rewards that will come in handy for those trips to Tampa, Fla. You can find the right credit card for your lifestyle by checking Bankrate's continually updated list of better credit cards.

Kiss your mortgage goodbye ASAP
As for larger obligations, such as home mortgages, the best time to say goodbye is just before retirement. The move makes sense for all the debt-related reasons mentioned above, but also because of some tax-related ones.

Remember that in the last few years of a mortgage, most of the monthly payment goes toward principal, rather than tax-deductible interest. Because the standard deduction is worth several thousand dollars, people late in a home loan who have no other deductions to itemize will often find the standard deduction to be their best option. As a result, someone near retirement who is, say, 27 years into a 30-year fixed-rate mortgage, generally doesn't get any benefit from keeping the loan.

"If it's feasible and it looks like you have more than enough savings, you should go ahead and pay off the mortgage," says David Morganstern, a certified financial planner at Capital Management Consulting in Portland, Ore. "The tax deduction is almost negligible."

Taking that step will free up more money to live off of, too, because monthly benefits checks will no longer have to go toward debt service.

"We like to get that satisfied so that all of the money coming in -- pensions, Social Security -- is income and doesn't have to go toward the mortgage," Morganstern says.

Count on Social Security -- a little
How much will that income be? That depends on how late in life a retiree decides to quit. The good news is that there will be some money coming from the government each month if you've been working all your life, despite all the talk of revamping the Social Security system that's been making the rounds during the past few years.

"The fear is that Congress is going to take away Social Security and that's just not true," says Carolyn Cheezum, public information specialist at the Social Security Administration. "You've earned it and the money will be there for you when you retire."

When you retire determines the size of your benefits overall, as well as the size of each monthly check: The earlier you retire, the less money you receive, the later you leave, the more you receive. A middle-of-the-road person would retire between 65 and 67 and receive average benefits, while somebody who worked until age 70 could expect to receive more cash.

Because it can be difficult to decide when retirement makes the most sense, concerned seniors may want to call the Social Security Administration at 1-800-772-1213 and ask for the Retirement Benefits booklet (publication No. 05--10035). It provides more information about the choices available to people. Someone a few years from retirement can also get a better idea of what their benefits will be by ordering their Personal Earnings and Benefit Estimate Statement , which provides an individualized look at their earnings history.

Company pensions kick in
In addition to Social Security income, some elderly workers can count on company pensions for retirement money. Most benefits are paid out in the form of an annuity -- a fixed monthly payment for the rest of your life. The formula used to calculate the annuity typically includes your final salary, years of service and a fixed percentage rate, often 2 percent.

When you leave your job, your pension benefits stay in the company-sponsored plan, where they can be claimed at age 65. Some pension plans can be tapped even earlier. However, like Social Security, your benefit may be reduced because you will be receiving benefits over a longer period.

Seniors who don't know if they have benefits coming to them can find out at Pension Benefit Guaranty Corp. or calling 1-800-326-5678.

Budget spending
So now that you know how to eliminate debt and figure out how much income to expect, what else is there left to do but polish up the golf clubs and tell the boss what he can do with his memos? For one, make sure the financial foundation you've laid is protected. Budgeting wisely can provide some security, and the right kind of insurance can provide even more.

You may have heard the rule of thumb that says a retiree's expenses tend to be 70 to 80 percent of pre-retirement expenses. Unfortunately, that's not always the case. Whether you plan to retire at age 55 or 75, you may have to think about compromising on some things to keep from eating up all your savings soon after leaving the office. For creative cost cutting tips visit Frugal U.

Retirees can live on substantially less than what they were living on before, "but not at the same lifestyle," says Michael Nieswiadomy, a professor of economics at the University of North Texas who co-wrote the book Expenditures of Older Americans.

Most retirees spend less on clothing and gasoline because those are employment-related expenses. But at the same time, out-of-pocket spending on health care goes up.

"After that, everything's a choice as far as what you choose to live on and ultimately how long your assets last," Nieswiadomy says.

If seniors want to enjoy the style of living they're accustomed to -- dining out, taking vacations, yakking long-distance with the kids -- they should be prepared to shell out almost as much in retirement as they did when they were working.

"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.

Hebeler says that he used to think the best way to estimate one's spending needs in retirement was to make out a detailed budget.

"But the problem is that you don't have a lot of visibility about the future," he says. "When you're 55 or 65, you can't really see what it's going to be like when you're 75 or 85."

Hebeler advises the soon-to-be-retired to draw up a detailed budget and then throw in a couple of scenarios: taking two trips annually to see each child, paying unexpected medical bills, forking over $500 for a new water heater. He also recommends keeping aside at least a year's worth of living expenses as a contingency fund.

Insurance needs change
Still, serious problems can foil even the best-laid plans. That's why soon-to-be retirees should consider insurance as a way to find some peace of mind. The three major types of coverage that are most worth looking at are long-term care insurance, Medigap insurance and life insurance.

Long-term care insurance helps to cover what Medicare doesn't. This can include long-term nursing, and rehabilitative and day-care services at home, in a community center or at a nursing home. It's insurance for the middle class. The poor and the wealthy don't need to bother: Medicaid pays for the poor, the wealthy can pay for themselves.

The same goes for Medigap insurance, which pays for some out-of-pocket medical expenses, such as deductibles and co-insurance. A few Medigap policies also pay for outpatient prescriptions. According to the Government Accounting Office, the average annual Medigap premium in 1999 was $1,300.

Life insurance is a third option. When you are deciding whether to buy it, says Harold Skipper Jr., professor of risk management and insurance at Georgia State University, "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."

If you are married or have a domestic partner, for example, your savings, pension and Social Security income might offer sufficient support after your death. In that case, your demise might not create a significant financial hardship.

A final word of caution: Don't go overboard, Skipper says.

"My guess is that there's a lot of people in their 60s and older who have more insurance than good financial planning would suggest they need," he says. "On the other hand, there are plenty of people who don't have enough. My advice is to be skeptical. Never buy anything without comparing with one or two competitors."

By following these steps and taking care of loose ends before retirement, experts say, soon-to-be retirees will find the Golden Years a little brighter.

Lucy Lazarony , Holden Lewis, Michelle Samaad and Amy C. Fleitas contributed to this story.

--Updated: July 23, 2002