Economic survival 101: How do I save for retirement?

PLAN AHEAD

Money sources

You're responsible for paying for your retirement, but a few devices can help you along the way.

- Find out how much your Social Security benefit will be. Call the Social Security Administration at (800) 772-1213 for a free Social Security statement or visit www.ssa.gov. Social Security offers a base on which to live on, but it faces financial problems. A 2008 annual report by Social Security trustees warned that after 2011, and as the baby-boom generation ages, the system will have "rapidly growing deficits."

- Company pensions can help with retirement. Look for a job that offers a pension. Pensions provide about a third of the nation's retirees with added cash each month. If you're close to retiring, check to see what your benefit is worth. Most employers will provide an individual benefit statement if you ask for one.

If you are changing jobs, find out what will happen to your pension before you move on. Learn what benefits you may have from earlier jobs. Find out if you will be able to get benefits from your spouse's plan.

- Many employers offer a 401(k) plan. More details on that below.

ITS NEVER TOO LATE

And never too early

Saving for retirement is more important now than ever.

- The good news is that people are living longer. The not-so- good news is that their retirement will cost more. A man who retires at 65 today would have a 50 percent chance of still being alive at 81, a woman 85. They have a 25 percent chance of living to nearly 90.

- People often assume that expenses decrease in retirement, but often that's not the case. Inflation means costs will go up, not down. Higher property taxes could raise your housing costs. Medical care may grow more costly as you age. And more free time could translate into more spending on travel and socializing.

- You can never predict when you will unexpectedly lose your job. A 2007 survey found that 37 percent of current retirees retired earlier than planned because of unexpected events, such as health problems, or changes in their company, such as downsizing.

- Remember that in retirement, you don't get overtime, bonuses or raises.

TAKE ACTION

You can start today

Changing bad habits now can help you later.

- Work on a retirement financial plan that lists all your expected monthly income and monthly expenses.

- Max out all your allowable retirement savings, including individual retirement accounts and 401(k)s.

- Strive to pay off your mortgage so you'll own your home when you retire.

- Consider downsizing to a less expensive residence.

- Take stock of your current income and resources.

- Readjust your spending so that more can stay in savings.

- See a financial expert or take a class in money management.

- It may all look like a blur of numbers, but read your pension fund, IRA and 401(k) statements to catch any mistakes that might occur.

- Prepare for higher health care costs, including expenses not covered by insurance, prescriptions and doctor appointments.

- Add extra money in your retirement budget to pay for federal and state income taxes, just in case you don't withhold any money from your pension or Social Security checks.

- Delay drawing on Social Security. Your monthly check will be larger when you finally collect.

- Realize that you may have to delay your retirement or get a part-time job to help with expenses. U.S. Labor Department statistics show that more men, still the traditional principal breadwinners, are working past age 65. A year ago, about 33 percent of men 65 to 69 in the labor force - those who wanted to work, rather than retire - actually had jobs. This year, it's about 36 percent. Ten years ago, it was about 25 percent.

- Consider using some of your assets to buy an annuity or longevity insurance to guarantee a monthly check for life.

- Set a date for retirement. This gives you a concrete number to help you figure out if you have the money to make it happen.

- Decide where you want to live. It's a major factor in determining how much money you will need.

BRASS TACKS

401(k) plan

- A 401(k) plan is a retirement savings plan that your workplace sponsors. The money you put in is deducted from your pay before taxes.

- Your employer offers various investments to choose from. You can opt for low-risk, medium-risk or high-risk investments.

- The money is automatically deducted from your paycheck, so you won't be tempted to spend the money elsewhere.

- It's easy to enroll. If your workplace offers a 401(k), your employer has all the materials you need to join.

- You choose how much to contribute and what to invest in, so you're the decider. You can make changes when you want to. The 401(k) statements keep you up to date on your savings.

- If your employer gives a company match, it's the same as free money. For example, your company may put in a dollar for each dollar you save in the plan, up to 3 percent of your pay. Then, it may add 50 cents for every dollar you put in after that up to 6 percent of your pay. That's a huge return on your investment.

- The money is always yours, even if you move to another job. If you change employers, the money can be rolled over into an IRA or your new employer's plan, where it can continue to grow tax-deferred.

- Compound interest is a key advantage of the plan. A 25-year old with a lump-sum distribution of $3,500 from a 401(k) plan will have $95,783 by age 67, assuming an 8 percent annual rate of return.

- Do all you can not to touch your 401(k) savings until retirement. If you cash out your account, you will pay federal and state taxes on the money you take out, plus a possible 10 percent withdrawal penalty on the money. And you lose the chance to increase the amount of money you have in a tax-deferred account.

- For employer-sponsored 401(k) plans, the maximum contribution is $15,500 in 2008. If you are 50 or older, you can make an added $5,000 catch-up contribution.

 IRAs

- With a traditional IRA, contributions are tax-deductible and only subject to income taxes when the money is withdrawn.

- An IRA is subject to a 10 percent penalty if you withdraw it before you turn

59-1/2. The only exception is if the money is used for buying a house or to pay for approved higher-education costs. Standard income tax still applies, but the

10 percent penalty is waived. This provides a great investment tool with flexibility for important purchases.

- In 2008, the traditional IRA allows tax-deductible contributions of up to $5,000 a year. You can contribute more if you are older than 50.

- The prime advantage of a traditional IRA is that you may be able to save on your taxes today by deferring those taxes until retirement, when you will probably be in a lower tax bracket.

- If you don't believe that simply an extra $1,000 a year can make a difference, do the math: If you put away $6,000 each year instead of $5,000 for 15 years and earn an average 8 percent annual return, you'll end up with $170,000 rather than $141,000.

Roth IRAs

- Traditional IRAs that are stock-heavy have lost a lot of money on paper, so you may think about converting to a Roth IRA. The taxes you must pay for the conversion will be relatively low.

- Roth IRAs are not tax deductible. But withdrawals are free from federal taxes if you have had the account open for at least five years and you have reached age 59-1/2.

- Maximum contributions to a Roth IRA are the same as those for traditional IRAs.

- Unlike a traditional plan, you can make contributions after age 70-1/2.

STATE OF THE UNION

A little more than half of Americans invest in a retirement plan, but the rocky financial markets are making it more difficult, according to a September survey by the Opinion Research Corp.

- About a third of Americans (34 percent) said that they had less than $50,000 in investable assets; 21 percent said that they had more than that, and 17 percent had no savings at all.

- Of the respondents between 35 and 44, 22 percent indicated that they had stopped or cut their retirement plan contributions altogether, more than any other age group. Half of those who reduced or stopped adding to their retirement plan said they did so because of the recent economic downturn.

A survey last year by the Investment Company Institute found:

- Fifty-three percent of workers in their 30s have employer retirement plans or IRAs with a median value of $17,000.

- By the time they're in their 40s, 59 percent of Americans have retirement funds, with a median value of $40,000.

- Two-thirds of U.S. employees 55 and older have less than $100,000 in their retirement accounts.

- About 60 percent of retirees 65 and older get most of their retirement income from Social Security. The average payment is about $1,000 a month.

A recent Boston College Center for Retirement Research survey found that job loss and serious medical conditions are common in later life.

- The group studied people in their 50s and 60s and found, for example:

About one in five lost a job in the 10-year study period from 1992 to 2002.

Overall, the study found six of 10 people in their 50s and 60s had some kind of serious negative shock that threatened their financial stability.