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Help! I haven't saved enough to retire

This week, we heard from two readers with radically different approaches to retirement planning. The Answer Desk, by's John W. Schoen.

This week, we heard from two readers with radically different approaches to retirement planning. Gene in Iowa has been living large, but at 60 he's just realized it's going to be tough to retire on what he's managed to put aside. Peggy in Alaska, on the other hand, is sitting on a sizable nest egg, but doesn't know what to do with it.

I recently turned 60. I have a small retirement fund with the company for which I work, roughly 27 to 28K at this point. I DO NOT want to work past 65 or 66. Is there any way to turn my financial mess around? I have never seriously thought of retirement and the need for money until recently. My philosophy was spend it if you've got, because you can't take it with you. Not sound financial thinking. Is there any hope?
— Gene H. Urbandale, Iowa

There’s always hope. But depending on your current living standard, it may be difficult — if not impossible — to stop working at 66 with $28,000 in savings. The only way you’ll know for sure is to sit down and work out a plan. The process is fairly simple:

Figure out how much you think you’ll need to support yourself. If you don’t have a monthly budget, sit down and make one — you’ll need to stick to a budget even more carefully once you stop working. Some retirement planners use rules of thumb like 70 percent of current spending, but only you can decide how much you really need. You may have to make some fairly drastic changes: some people end up moving to a cheaper part of the country to stretch their spending power, for example.

If you’re currently covered by health insurance at work, try to figure how much you’ll need to budget for health care expenses. Even though you’ll be eligible for Medicare, it doesn’t cover all health costs. The rapid rise in health care costs is one of the leading causes of bankruptcy filings among Americans over the age of 55.

Once you’ve got that monthly spending number, find out how much you’ve got coming from Social Security — by contacting them and asking for a statement.  This will show how much you’ve paid in over the years and estimate how much you’ll collect. The longer you wait to start collecting, up to age 70, the higher the monthly amount you’ll get for the rest of your life.

You should also consider how fast you expect your spending to increase. No one can reliably forecast inflation for the next 30 years, but your Social Security check will go up each year based on the average cost of living. Still, depending on your budget, your costs may rise more quickly.

If your estimated budget is higher than your estimated Social Security check, you’ll need to make up the difference. That means either getting by on less (go back to your budget), or making more money — or both. The most obvious way to close the gap is to continue working past 66, despite your strong desire not to. You may not have to work full-time. And a lot of retirees find they get bored doing absolutely nothing and miss some form of paid work.

In any case, you’re in good company.  As a group, baby boomers are delaying retirement — in many cases because they can’t afford it. But people are also living longer and are in better health than past generations, which allows them to work longer than their parents’ generation.

Even though you’ve put it off this long, it’s never too late to come up with a retirement plan. You may not like the choices you’re presented with. But it’s better than having no plan at all.

Upon retirement in May, 2008, I will receive approximately $470,000. How can I invest this to receive monthly benefits of at least $2,500?
— Peggy G., Anchorage, Alaska

There are a number of ways to go: a lot depends on what other income and savings you’ve got. You also need to decide whether you want to live on just the investment return - or whether you’re comfortable spending the principal gradually over time.

Let’s say you put the money in a good old US Treasury bonds. At the moment, the 10-year Treasury is yielding about 5.25 percent. So if you invested $470,000, you can expect roughly $24,675 a year in interest payments (not compounded), or about $2,056 a month - a bit short of your income target. On the other hand, if you tapped the principal, over the course of 20 years you could boost your income to $2,405.25 – close to your target. The risk is that you outlive your savings: at the end of 20 years you’ll have nothing left in this account.

If you want to live off income only, you’ll need to find a way to generate a higher return than Treasuries; that means taking on more risk. To generate $2,500 a month, you’ll need to find an investment that returns roughly 6.4 percent. You could probably get that from a mutual fund that invests in bonds, but there’s the risk that if interest rates rise, the value of your fund shares could go down. You could try for even higher returns with a stock mutual fund, but you will almost certainly have uneven returns — and could lose a big chunk of your savings in a down year.

Another option that’s out there is an annuity, which is more like an insurance policy. There are lots of different flavors, depending on what kind of coverage you need. (Do you want to include benefits for a spouse that survives you? Do you want your income to vary and take advantage of market gains — or guarantee a fixed payment that shields you from market downturns? Do you want to lock in an income for life — or guarantee only for a set number of years?)

The problem with annuities is that they can be very complicated — and it’s harder to figure out just how much you’re paying in fees. If you chose the security of a fixed payment for life, you’re also betting the issuer of the annuity that you’ll live longer than they think you will. And usually, buying an annuity means you leave nothing to your heirs when you die.

Keep in mind that if you set this up to pay fixed monthly payment for life, your spending power will gradually decline as inflation eats away at your $2,500. So you’ll probably want to set this up to provide you with a gradual increase in payments to help keep up with inflation.

You also need to consider what your taxes will look like. If you decide to buy bonds, for example, you can save a bundle on taxes with municipal bonds.

And your retirement plan should also include some estate planning. Some people, for example, who have already decided to leave money to charity in their will find they're good candidates for something called a Charitable Remainder Trust. Basically, you give money to the charity of your choice now, and that charity sets up a trust that pays you a fixed amount monthly as long as you live. You can also get a tax deduction for part of the gift while you’re still alive. That can be useful if you have a big capital gain to offset — like the sale of a house.

But which option is “best?" It’s hard to come up with a single “right” answer — a lot depends on how this piece of cash fits with other sources of income, assets, taxes, etc. For that, you really need to sit down with a good financial planner. A few hundred bucks for their fee could more than pay for itself in money you save down the road.