Time to Get Real
by Penelope Wang

November 9, 2007

[Continued, page 4]

True, but that doesn't mean it's a good idea. Debt is a problem facing a growing number of seniors. In 2004 (the latest data available), households headed by someone 75 or older carrying debt loads jumped to 40.3%, up from 29% in 2001, according to EBRI. The average debt amount climbed to $20,234 vs. just $9,549 previously.

During a time of economic growth and soaring markets, it's easy to believe that your income will keep rising faster than your debt payments, which offsets the risk of carrying a hefty credit-card balance, say, or tapping your home equity for a new kitchen. But in retirement you can no longer count on that unlimited potential for better pay. If you don't cut your debt load while you're still working, says Marilyn Dimitroff, a financial adviser in Bloomfield Hills, Mich., you will face the worst possible scenario: a retirement saddled with mounting debt and only a limited income to repay it. Don't let that happen to you. Before you tap your home equity to build a spa in your basement or finance your around-the-world trip on a credit card, remember that it gets harder to pay off debts, not easier.

Wouldn't it be great to call it a career in your fifties and spend the second half of your life doing whatever you want—with no money worries to get in the way? For many Americans that's the dream. Yet when you consider how much you have to overcome to retire early, that dream looks more like wishful thinking. You need a portfolio big enough to support you for some 30 or 40 years (see the table at right). You won't qualify for Medicare until age 65, and full Social Security benefits don't kick in until at least age 66. The only way to pull off this feat is through prodigious saving—at least a third of your take-home pay.

Still, this isn't a bad myth to strive to make true. With four out of 10 workers forced to leave their jobs sooner than planned because of layoffs or health problems or to care for an ailing relative, according to a McKinsey survey, it's hard to go wrong by saving and investing for the goal of an early exit date. If you choose to work longer, you'll have that much more secure an eventual retirement.

Okay, it would have been better to start saving early, but let's face it: Most people don't. Still, there's hope for late starters (even those starting at 50). A few years of serious saving can make a huge difference to your quality of life in retirement. "The first thing you need to do is take a reality pill," says Martha Priddy Patterson, director of employee-benefits analysis at Deloitte Touche. "Figure out what you have and how much you'll need to put away for a decent retirement." Then launch into savings overdrive—you need to stash away as much as, or more than, someone seeking to retire early. You do have one thing going for you. Anyone over age 50 can also make catch-up contributions of as much as $5,000 to a 401(k) and an additional $1,000 to an IRA.

You might be surprised at how quickly your work can show results. Say you are a 50-year-old earning $100,000 with only $150,000 saved. Research by T. Rowe Price shows that if you put the max in your 401(k), including a catch-up contribution and a 50% match, plus invest another 5% outside the plan, you'll have $1.5 million by age 65, assuming you earn an average of 8% a year. With that, a true retirement will be no myth at all.

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