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How to plan for retirement at the 11th hour

In a perfect world, we would all start saving for retirement at 22, work until we become millionaires, quit on our 65th birthday, and head for the nearest sandy beach for the rest of our natural lives.

But what’s the point in getting caught up in a fantasy? For most people, planning for retirement is like that flickering light bulb they keep forgetting to change until one day it’s gone and all the stores are closed. More than one-third of people over 55 haven’t saved more than $10,000 for their golden years, according to the Employee Benefits Research Institute.

“There’s a great deal of information in the marketplace for people who are in their 30s and 40s and people who have already retired,” said Emily Guy Birken, author of The Five Years Before You Retire. “But there’s not a lot for that segment of people who are facing retirement but aren’t quite there yet.”

Can you plan for retirement at the 11th hour — five years or less from when you want to retire? We think so. Here are some ways to get started:

Get a clear picture of where you are at financially (preferably with a little help).

“Particularly, when it comes to things like finances, to me it’s like weight loss. The first step is get on a scale and figure out where you are,” says Birken. “Look at all the financial statements [that] have been coming in and you’ve been ignoring, and figure out how much money you have and how much you’ll need.”

Part of that calculation is getting an estimate of how much you’ll need to sustain your current lifestyle in retirement (though it’s helpful to keep in mind that your overall expenses are likely to decline). Figuring it out is tricky. Try using a retirement cost calculator like these from Bankrate, the AARP, and Kiplinger.

If a few years is all you have until your desired retirement date, a certified financial planner can certainly help develop a plan. Ask family or friends for a recommendation or book a consultation with a fee-only planner who charges an hourly rate http://napfa.org. The benefit of a having an advisor on hand is that they can crunch your numbers and tell you exactly how much you’ll need to save up by retirement.

Eliminate as much debt as possible.

A key component of any retirement plan is figuring out how much debt you have compared to income. Your mortgage and credit card debt won’t turn to smoke when you turn 65. Even Uncle Sam won’t hesitate to garnish your Social Security income (up to 15%) to recoup student loan debt or past taxes owed.

“You’d be amazed how many people punch out for the last time at work and waltz home with credit card debts, boat payments, two car payments, timeshare obligations, and a hefty mortgage,” says Roger Roemmich, chief investment officer for ROKA Wealth Strategists, and the author of Don’t Eat Dog Food When You’re Old.

It’s hard to resist the temptation to tackle your mortgage first, and many pre-retirees throw everything they’ve got at it, making payments ahead of time just to cross the finish line mortgage debt-free. As good as it may feel, this can be a costly mistake.

“Too often those [people] five to 10 years from retirement pay extra on mortgages and fail to take maximum advantage of tax-deferral opportunities [like contributing to an IRA or Roth IRA],” Roemmich says.

Unless your interest rate is greater than 5%, Roemmich advises against pre-paying on home loans. You can always deduct mortgage payments from your taxes. The same can’t be said for lingering credit debt, which is almost sure to have a higher interest rate anyway.
“Non-deductible debt (i.e., credit cards) should be viewed as very short-term debt and paid off at the earliest possible time,” he says. “There are very few investments that return enough to suggest investing in lieu of paying off credit card debt.
Get real about Social Security benefits.

It can be terribly tempting to take Social Security benefits the minute you turn 62. It’s your money, but the longer you wait, the bigger your payday will be.

If you reach full retirement age (62) and then wait until 70 to start taking Social Security, “your benefit will get an annual 8% increase for every year that you put off collecting,” says Gloria Birnkrant, a certified public accountant in Beverly Hills, Calif.

You’d be hard-pressed to find an investment that can promise a guaranteed 8% annual return. And those gains truly add up. For a worker who retires in 2014, the difference between the average monthly Social Security benefit at age 62 and age 70 is $1,433 — more than $17,000 a year.

For spouses, Roemmich typically recommends staggering Social Security benefits. For example, you can start drawing on your spouse’s benefits at age 66 and defer your own Social Security until age 70.

“Note that this strategy both increases future cash flow but all the increases will receive future purchasing power protection because Social Security is inflation-adjusted,” he says.

Whatever you decide to do, consider getting some guidance from a certified public accountant, who can also help walk you through the tax implications of Social Security. The National Society of Accountants and the American Institute of CPAs both keep a great database of tax pros in your area.

Make a plan for long-term health care (even if you feel invincible).

There’s a reason why nearly 80% of long-term care for the elderly is provided by family members. It’s often prohibitively expensive to hire outside help and the majority of retirees need long-term health care at least once in their lives.

If, like 20% of seniors, you wind up disabled and in need of full-time care, you’ll have to pay completely out of pocket (Medicare doesn’t cover the cost of long term nursing home care).

“If you don’t have long-term health care insurance, it basically means impoverishing yourself [if you wind up needing extra care],” Birken says.

Investing in long-term care insurance can help fill in gaps in Medicare coverage for seniors, but it comes at a cost. The cheapest plans can cost up to $3,000 a year for a 65-year-old, which Roemmich says is the reason so few retirees sign up.

“Within the last month I have had two clients go into nursing homes,” Roemmich says. “They were in different regions of the US but the initial nursing home costs were $7,000 per month.” So think of long-term care insurance this way — $3,000 a year is a lot cheaper than the $83,950 a year you’d shell out for a private nursing home stay without insurance.

If you’re still balking at the price, Roemmich advises his clients to consider a few other options that don’t require buying long-term care insurance alone: buy a life insurance policy that comes with additional long-term care coverage, or buy a fixed or variable annuity with additional long-term care coverage.

Your biggest goal of all — do what you need to do today to maximize your cash flow tomorrow.

For retirees, cash flow is everything. Relying on a fixed income like Social Security alone is a recipe for poverty. Your job before you retire is to figure out how you can keep your income flowing, even if it means taking on part-time work.

Every case and client is different, of course, but here’s a basic strategy Roemmich says most workers should follow when preparing to maximize cash flow in retirement, tying in all of the steps we laid out before.

1. Plan to defer drawing Social Security until 70 or at least 66 if possible. Social Security postponement has one of the best (i.e., lowest) risk/reward relationships of any strategy available.
2. Save, save, save. And then save some more. Tax-deferred savings accounts like an IRA or 401(k) not only maximize your savings but they reduce your taxable income and, in some cases, your tax bill. If you don’t think you can find funds to beef up your retirement savings, Roemmich says to consider taking out a low-cost home equity loan and putting that money directly into an IRA. The reason: you’re going to earn interest over time in an IRA. So long as the return on that IRA is greater than the interest rate you’d pay on a home equity loan, it’s worth considering.
3. Pay down high-cost debt (at any age) but not low-cost debt.
4. Don’t retire too soon.

“You may not live the retirement of your dreams,” says Roemmich. “The sooner you realize what kind of life you can afford, the better you’ll be able to prepare for what life will be like on a fixed income.”

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