Nearly Retired

by Gary Foreman

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I am 50 with no savings!! How can I start? Need any and all advice.

Dinah sure has a lot of company. Recent Congressional research showed that only 40% of workers have a plan in place for retirement. Even among those over age 55, only 47% had retirement accounts. And the median value of the account was less than $25,000. So a lot of people need to begin saving for retirement.

The first step for Dinah is to try to get an idea of how much money she'll need. If she's among the two thirds of Americans who expect to continue in her current lifestyle after retirement, she can expect to need about 80% of her preretirement income. That's a surprise to many people.

Where will she find that much money? Dinah should begin by finding out about any existing plans she may have through past or present employers. Even if she doesn't have any private company pension, she'll be eligible for social security. To find out how much she'll receive call the Social Security Administration at 800-772-1213. Ask for the Personal Earnings and Benefit Estimate Statement.

Once Dinah has some idea of how much income she'll need and what's already available she can calculate how much additional she'll need to provide. For illustration, let's assume that she'll need an extra $10,000 in income each year.

How much will she need to save to get that income? We could go through a lot of discussion and complicated formulas. Whole books have been written on just this subject. But for our purposes, I'd assume that Dinah should be able to safely get about 7% in income from her savings each year. That's a realistic, conservative long-term rate.

To find out how much savings will be required to generate the income, just divide the income desired ($10,000) by the rate of return (7% or 0.07). In this case Dinah would need about $143,000 to produce $10,000 in income each year after retirement if it earned 7%.

So how does Dinah begin to save that much money? Much of what she'll need to do is the same as if she were beginning any saving program.

Begin by setting some goals for her savings. Can Dinah manage to save $5 each week? Begin with something simple. She might not know where to find an extra $5. She'll need to take a look at her habits and see what she can change that will make $5 available each week. It will almost certainly require her to change some habits.

Start today. Even if she can only save 50 cents this week, that's better than nothing. And if she does the same or better next week a new habit will be starting. Sure, more is better. But actually saving 50 cents is better than complaining that you can't save $5.

Once Dinah begins to save some money she'll need to decide where to keep it. Here the goals are safety and growth.

Begin with a separate saving account. Once Dinah has put money into the account it should stay there unless she's moving it to an investment account that's earmarked for her retirement.

After she has accumlated some money in the savings account she should periodically move some of it to a no-load, growth mutual fund. There are a number of excellent ones available. Historically a fund of this type will earn nearly 10% per year over the long haul.

Dinah should contribute to a tax deferred retirement plan. If she is eligible for a 401k plan she should sign up. Also begin contributing to an IRA. Her money will grow much faster if she doesn't have to pay taxes on the earnings each year.

Dinah should learn some of the investment basics. Your potential risks and rewards differ with various investment choices. Learn the differences and which would work best for you. It's really not that complicated. The important investment concepts are easy enough to understand. There are local adult ed classes, online courses and even books that can explain the basics.

Dinah is smart to get started now. Yes, earlier would have been better. She might have started too late to guarantee a comfortable retirement. But she can still make a significant difference in her future standard of living.

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money and Gary shares his philosophy of money here. You can follow Gary on Twitter or visit Gary Foreman on Google+. Gary is also available for audio, video or print interviews. For more info see his media page.

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