Retirement Savings Slim? You Can Make Up for Lost Time in the End

Ellen Hoffman has a simple message: It’s never too late. No matter how old you are or how little you’ve saved, you can become retirement-prepared, says the author of “The Retirement Catch-Up Guide” (Newmarket Press, 2000).

That idea, which may provide some comfort to the tidal wave of baby boomers facing retirement, increasingly is being backed by financial planners and the federal government. Congress is weighing plans to allow those 50 and older to make big “catch-up” contributions to tax-favored plans such as an IRA or 401(k). The Senate will take up the measure next month.

Meanwhile, a growing number of experts maintain that the five years before and the first five years after retirement begins may be the most important in determining your overall retirement comfort.

The reason is simple. Typically, your income increases over your working life, which means that you make the most when you are the closest to retirement. In many cases, spouses who stayed home while the kids were young have gone back to work now that the children are grown and out of the house.

At the same time, most people have already handled life’s biggest expenses--buying a home, sending the kids to college and paying for the weddings--by the time they’re in their late 50s and early 60s. That often leaves pre-retirement couples flush with cash and able to save like never before.

That’s the positive part, says Michael Stein, a certified financial planner in Boulder, Colo., and author of “The Prosperous Retirement” (Emstco Press, 1998).

The negative side is something he calls “lifestyle creep.” This boils down to the old idea that when you have money you spend it. Pretty soon you’re so used to spending that it seems as if it’s a sacrifice to spend less. As a result, you require a bigger nest egg to keep you in the style to which you’ve become accustomed.

Meanwhile, the first five years following retirement have the potential to become a second childhood, Stein says. Healthy seniors with considerable nest eggs can start to spend like there’s no tomorrow--or at least as if their money doesn’t have to last several decades. The typical 65-year-old can expect to live almost 20 more years.

“We call it the decision decade,” says Christopher Price, senior vice president of insurance products at Delaware Investments in Philadelphia.

Make the right decisions in that 10-year period and your money will probably last as long as you do, ensuring a comfortable--although sometimes modest--retirement, Price says. Make the wrong decisions and you could easily outlast your cash.

So, what are the right things to do if you haven’t saved much and retirement is looming?

* Save like crazy. If you have a few years of employment ahead and you find yourself in the enviable position of having extra discretionary income, save it--all of it. A family with a spouse reentering the work force while the other simply gets regular raises could conceivably save one-third of the money needed for retirement in just five years, Stein says. They can do that by saving the bulk of the additional income they earn, including all of the second spouse’s take-home pay. That not only boosts their savings dramatically, it also prevents them from raising their living standards right before retirement.

* Rethink the term “retire.” The concept of retirement is changing rapidly as Americans remain healthier later in life, Hoffman says. Increasingly, when seniors say they want to retire, they really mean they want to leave their present job, but may be willing to work at least part time.

For someone who hits retirement age woefully short of cash, that’s a pivotal distinction. Hoffman recently interviewed a 66-year-old “retiree” who left his job as a minister but began a consulting service for nonprofit groups. His consulting income, coupled with Social Security, is enabling him to save for the first time.

Stein has advised several clients who found retirement work that improved their lifestyles. One client became a golf pro. Another became a fishing guide. Still another started a model-train business that was so successful he sold it for $500,000 a few years later, because the lucrative hobby was consuming too much of his time.

* Consider a move. Many people counsel seniors to consider moving to unlock the often considerable equity in their homes, but Hoffman notes that an equally compelling reason to move can be the ability to save on maintenance costs.

All too often, the big houses and yards that were attractive when raising a family now only attract a costly staff of gardeners, pool cleaners and housekeepers. This frequently results in seniors paying hundreds of dollars in monthly upkeep costs that they could save if they moved to smaller quarters.

Those who decide to not only scale down, but out of the real estate market can save more. If you rent, rather than own, you also save the cost of property taxes and, often, some utility bills.

* Seek forgotten sources of retirement funding. Most people have numerous jobs throughout their working lives, but many forget to keep in touch with former places of employment where they may have earned vested pension benefits.

Sit down and make a written record of your employment history and then contact those companies’ benefits departments to ask whether they’re holding pension money for you, Hoffman suggests. There’s a good chance you have a pension coming if, since 1975, you have worked for a company for five years that offered a defined benefit plan.

If one or more of those companies cannot be found or no longer exists, check with the Pension Benefit Guaranty Corp. The PBGC, a quasi-government agency, ensures that workers get their defined benefit pension payments when companies fail. The organization also has a lost-pension search service, which can be accessed on the Web at https://www.pbgc.gov; by writing to the PBGC at 1200 K St. N.W., Suite 240, Washington, DC 20005-4026; or by phone at (202) 326-4000. Hoffman knows several people who have collected tens of thousands of dollars this way.

* Create a spending plan. Those just retiring should map out a plan for spending over their remaining lifetime, Stein adds. After figuring out how long you think you might live, how much you think you would earn on your money in the meantime and how set you are on leaving money to heirs, you’ll have a good idea of how much you can spend each month without worrying about dying destitute.

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Times staff writer Kathy M. Kristof welcomes your comments and suggestions. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com.