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When You're Already Behind on Retirement

Retirement

Maybe you cared more about Woodstock than shares of stock. Or it could be that you kept a closer eye on your favorite MTV VJ than on your 401(k).

Whatever the reason, you've put off saving for your retirement -- until now. With retirement on the horizon, you worry that you're too late, that you'll never amass enough money, that your retirement dreams will stay just dreams.

If that's you, then listen up: It's not too late! If you're within 20 or even 10 years of retirement and haven't saved, you can still get a plan rolling. Here are three ways:

1. Save like mad.

If You're Within 20 Years

Want a half-million dollars? Start investing $1,000 a month right now, and you could possibly have a portfolio worth more than $460,000 in 20 years. This assumes a monthly investment of $1,000 is made at the beginning of each month for 20 years with a 6% return. Granted, to have a chance at this result, you would have to build a diversified investment portfolio of stocks and bonds. If this approach doesn't suit your risk profile, the numbers might be different but the call to action is the same -- save like mad.

Think you can't save that much? Think again. Saving $1,000 a month doesn't necessarily mean you have to cut your spending by that much. If you contribute to a tax-deferred retirement account -- such as a traditional 401(k), 403(b), 457 or other employer-sponsored plan -- every dollar you save reduces your taxes, since contributions are not counted as income.

If you're in the 25% tax bracket, for example, a dollar deposited in your retirement plan cuts your tax bill by 25 cents. Put another way, you have to reduce your spending by only 75 cents to save $1. The news gets even better if your employer matches your contributions. To add $1,000 a month to your account, you may have to contribute only $500 to $700 (depending on your employer's formula for matching contributions). Your employer may make up the difference.

Federal rules allow you to put away up to $17,000 in 2012 in a 401(k). And if you'll be at least 50 by the end of the year, you're eligible to make catch-up contributions of an additional $5,500. So even if you haven't saved a dime at 50, maxing out your 401(k) could still potentially rack up more than $500,000 by the time you're 65 (assuming a 6% average return).

Once you do that, consider a Roth IRA. You can contribute up to $5,000 (plus another $1,000 if you're over 50) of your after-tax income, and the earnings can be withdrawn tax-free once you turn 59½ and have held the account for at least five years. For 2012, you don't qualify for a Roth IRA if your income exceeds $125,000 (single) or $183,000 (married filing jointly). But there are still other alternatives. A traditional IRA, guaranteed savings annuity or taxable investments such as mutual funds can help.

If You're Within 10 Years

Saving $2,800 a month for 10 years to get even close to $500,000 is probably a pipe dream. But don't let the size of the task deter you from taking the first step.

"When it comes to retirement savings, every bit helps," says Scott Halliwell, a CERTIFIED FINANCIAL PLANNER™ practitioner at USAA. By saving $300 a month right now, you could have a portfolio worth nearly $50,000 in 10 years. This assumes a monthly investment of $300 is made at the beginning of each month for 10 years with a 6% return. That's money that can create some alternatives later, such as allowing you to work part time instead of full time to fill the income gap.

In the end, no matter how much you're able to save, it will be better than nothing. Just because you may not have the retirement of your dreams doesn't mean you won't need or want the money you can accumulate. If you don't save it, you won't have it.

2. Spend smart.

If You're Within 20 Years.

There are hundreds of ways to reduce your spending without significantly impacting your quality of life. If you look at where every dollar goes, you'll likely find expenditures that just as easily could have been savings. So to help improve your future, spend smart now.

Where will you get that extra money? You'll stop spending cash on things that aren't very important to you. You'll get basic cable -- or cancel cable altogether -- instead of paying $70 to $100 a month for 300 channels you never watch. You'll cancel that gym membership you never use. You'll bring your lunch and snacks to work. You'll call around for better deals on your home and car insurance. You'll borrow videos from the library instead of renting them online. You'll shop for cheaper cellphone service. Instead of going to an expensive restaurant, you'll get creative and have picnic dinners by the lake, on the beach or in your backyard.

"Remember, reducing expenses doesn't have to mean no fun whatsoever; instead, just look at cutting back," says J.J. Montanaro, a CERTIFIED FINANCIAL PLANNER™ practitioner at USAA.

If you go out to dinner every Friday night, cut back to every other week. You'll still get the enjoyment of dining out, but you'll reduce the monthly cost by half. Apply this rule to all your regular discretionary expenses to see how much you can save.

If You're Within 10 Years

You need to reduce your spending and free up money to build your nest egg, but you also should map out a long-term spending plan that's reasonable and sustainable. Look at Social Security and other income streams you think you can count on in retirement and start building a budget that fits that reality.

Since you have limited time to save money, it's almost certain that you will have less to live on when you do retire. Plan to make your spending cuts gradually over the next 10 years and ease into this simpler lifestyle.

3. Choose how you want to live.

If You're Within 20 Years

If you're thinking about retirement, it might be because you don't like your current job. Yet if you haven't saved enough, you'll have to keep working for a while.

Why not consider a career change? Unless your lifelong ambition is to be the next NFL Rookie of the Year or Lady Gaga, it's not too late. Most professions don't have age restrictions, and anyone can go back to college and earn a degree.

Don't just think about how you'll retire, but consider what you want to do with the rest of your life. Is there a job you always wanted to try? A business you always wanted to start? A hobby you could turn into supplemental income (and a source of additional savings)?

Take a few minutes to think about what kind of work you'd enjoy, and then spend some time this week investigating what it takes to get that kind of work. And while you're at it, look for employers that offer the best benefits — a retirement plan match, tuition reimbursement, perhaps a traditional pension, maybe even health care for retirees.

If You're Within 10 Years

There is no time like the present to honestly assess where you stand now and make a realistic forecast for the future. A financial adviser can help you put all the pieces together.

It may be that the assessment yields this verdict: You'll have to continue working later than you'd hoped. That's not necessarily bad news. Work can result in a more mentally and physically active lifestyle that increases your quality of life. Continued employment also allows you to stay connected to the people in your workplace.

"When folks stop working they often tell me that while they don't miss the work, they do miss the people," says Montanaro.

On the financial front, work allows you to make progress on both sides of the cash-flow equation. Time at work is time spent earning instead of spending money. And don't forget the benefits that can come with employment, such as health care, matching contributions to retirement plans and the potential to increase your Social Security.

Putting It All Together

Even if you can't save $1,000 a month or bear the thought of working another 20 years, it's not too late to improve your situation. Saving what you can right now, and combining the income your portfolio can provide with Social Security and maybe a pension, could allow you to retire part time. For many people, that's a lot better than having to work full time forever.

-- This article was written for USAA by The Motley Fool's Robert Brokamp.

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