Boomers: It's not too late to nurture a nest egg

Yikes! You woke up this morning and suddenly realized you haven’t saved a dime for retirement — and you’re already middle-aged!

What now?

In a perfect world, every 40- or 50-something would have a tidy nest egg. But in real life, other financial priorities often come first — putting your kids through college, medical expenses, just living day to day...

But now it’s time to buckle down. After all, fewer and fewer Americans can rely on the traditional pensions that kept their parents comfortable in retirement, and the government may have a hard time providing the full Social Security benefit it has promised.

So savings and investments are essential. And if you assume you’ll live to 95 or 100, it will take a lot.

Consider this frightening fact: To produce $1,000 in monthly retirement income, it will take a $300,000 nest egg.

That’s because a widely used rule of thumb says retirees should spend no more than 4 percent of their nest egg each year. That $1,000 a month is $12,000 a year — 4 percent of $300,000.

If a 4 percent “withdrawal rate” seems low, it’s because the withdrawals need to grow every year to counteract inflation, which can double prices in 20 years. For withdrawals to grow, the nest egg has to grow.

In other words, every $100 in savings might earn $7 a year with a good mix of stocks and bonds. You could spend $4 and leave $3 in savings, so you’d have $103. Then the next year you’d earn $7.21, and you could spend $4.12 — 4 percent of $103. Your spending would go up by 3 percent to offset inflation.

As the years go by, you’d probably need to dip into the principal rather than just live off investment income. So the 4-percent-a-year rule assumes you’d probably spend all your money by the time you’re 95 or 100.

If you’re already 50 or so, it will take some belt-tightening to accumulate $300,000 by the time you’re 65. You’d have to save about $16,000 a year and invest it at a 7 percent annual return. (The actual number would vary depending on your tax situation and other factors.) Obviously, if you need $2,000, $3,000 or $4,000 a month to fill the gap between your expenses and other income, such as Social Security and pension, your belt needs to be even tighter.

Okay, so much for the scare tactic. Maybe the situation isn’t as hopeless as it looks. Here are some suggestions for getting going.

Start by looking at your spending. Keep a record of every penny that goes out over the next couple of months. And I mean every penny — every bag of potato chips or quarter put into a parking meter.

Then look for things to trim. Start with cuts that are easy and won’t hurt, like bottled water when tap water will do. Work your way up to things like entertainment, meals out, premium cable service or unlimited long-distance calling plans. Many households can trim hundreds of dollars of monthly expenses with no serious effect on quality of life.

Still, you might have to take more extreme steps, like getting rid of the second car, moving to a cheaper place or vacationing at a campground instead of a resort.

Remember that a dollar saved today is worth a lot more than a dollar saved in five or 10 years, because it will have more time to compound as an investment — to grow as you earn interest on interest.

Now think about your life in retirement.

Interactive Retirement calculator Fill in your information and see if you're saving enough to make it comfortably through your retirement years.

Another rule of thumb says it will take 70 to 80 percent of your pre-retirement income to maintain your standard of living in retirement. But you might be comfortable on less. Maybe your mortgage will be paid off by then, or your children will be grown. Perhaps you’ll want to move to a smaller, less expensive place, converting some of the equity in your current home to cash for living expenses.

If you do have a pension at work, ask your benefits folks how much you’ll receive and how the figure will change depending on how long you stay on the job and how much your income grows.

Also, look carefully at the Social Security statement that comes each year a few months before your birthday. It estimates your retirement benefit, assuming you keep earning as much as you do now. (You can get an estimate right away at the Social Security Administration's Web site.)

Think about postponing retirement a few years, or continuing to work part-time after you "retire." This will give your investments longer to grow and reduce the number of retirement years you need to fund.

The effect can be dramatic. By planning to retire at 70 instead of 65, the 50-year-old in the example above would have to save just $11,000 a year instead of $16,000. And if you assume this person will get raises and be able to increase annual savings by 3 percent every year, the figure drops to about $8,400 – only about half of what we started with.

To produce these kinds of figures for yourself, get some good financial software for your computer. The most common, Quicken, has a good, easy-to-use retirement planner that will tell whether you’re saving enough. It shows how changing variables such as the projected investment return, the inflation rate or retirement age can affect the results.

Of course, smart investing is critical — and you don’t have to be a financial genius or turn investing into a second job.

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