Smart Retirement Steps

Having enough at retirement happens by being diligent and consistent over the years. Starting early allows your money to grow over a longer period of time, but if you're starting later, you can still make smart choices that will increase the likelihood that you retire with enough.  Here are some tips based on age:

Enroll in your 403(b) or 401(k). Most major companies that offer retirement plans match a percentage of your contributions. Typically, these matches range from 25% to 100% of your contribution, up to 6% of your salary. Even if the match is at the low end, that's an immediate 25% return on your investment, you're not going to get that kind of return anywhere else.

In addition, the money that you contribute to your 403(b) or 401(k) is excluded from taxable income. Once you take the tax break into account, a 6% contribution only feels like 4%.

Fund a Roth IRA if you don't have a 403(b) or 401(k). Many small employers don't have the money or manpower to offer a 401(k) plan at all, let alone one with a company match. That means you have to create and manage your own retirement plan.

For most young workers, the best choice is a Roth IRA. Contributions aren't tax-deductible, but you can withdraw them anytime tax-free. And as long as you wait until you're 59 1/2 to take withdrawals, earnings are tax-free, too. (Funding a Roth is a good idea even if you are contributing to an employer's retirement plan; read on to find out more.)

You can invest up to $5,000 in a Roth in 2012. That doesn't mean you need $5,000—or even $1,000—to get started. Some mutual funds and brokers will waive minimum investment requirements if you sign up for an automatic investment program.

Pay off student loans—in good time. Don't pay off federal student loans more quickly than necessary, Ritter says. The interest rate—between 3.4% and 6.8% for loans issued after 2006—is fixed and relatively low compared with the rates many borrowers get on private student loans, and up to $2,500 of the interest is tax-deductible.

Resist cashing out a retirement account. When you leave a job, you have several options for your 401(k) plan. You can leave it with your former employer, roll it into an IRA, roll it into your new employer's plan (if your employer permits such rollovers) or ask your former employer to cut you a check. You may be tempted to choose the last option, but in most cases, that's a bad idea. Your employer will withhold 20% of the amount withdrawn to cover income taxes. And because you're under 55, you'll also have to pay a 10% early-withdrawal penalty on the entire amount. Plus, you're jettisoning any growth you've earned, which sends you back to square one when you start saving again. Workers who cash out their 401(k) plans reduce their retirement income by up to 67%, according to an analysis by the Employee Benefit Research Institute.

Prepare for contingencies. If you haven't done so already, fuel an emergency fund with enough to cover at least six months' worth of basic expenses. That cushion can prevent you from raiding your retirement accounts after a layoff or keep you from borrowing your way out of a crisis.

Before you have children, contribute as much as you can to your 401(k), but don't neglect the Roth IRA. It costs you in taxes now, but down the road, that money is tax-free. Keep contributing at least 10% of your gross income toward retirement savings. Once the kids arrive, you'll likely have to pull back if one spouse leaves the workforce or to pay for child-care costs.

Siphon off cash for a down payment. Sacrosanct as retirement accounts may be, some financial planners consider them fair game for a down payment on a first home. To justify this strategy, you need to have enough time before retirement to replenish the accounts. If you're 45 or older, don't even consider the idea. Also be strategic about which account you tap. With a 401(k), for instance, you'll incur taxes and a 10% penalty on early withdrawals. But with an IRA, Uncle Sam waives the 10% penalty on a distribution of up to $10,000 for a first-time home buyer—although you'll still owe taxes on the withdrawal. If your spouse is also a first-time home buyer, you can each withdraw up to $10,000 penalty-free.

You can usually borrow against your 403(b) or 401(k), an option not available with IRAs. You are allowed to borrow as much as half your balance, up to $50,000, for any reason. You generally have to repay a 401(k) loan within five years or it's considered a taxable distribution. But your employer may allow you as long as 15 years if you're borrowing to buy a home.

Already own your home? Consider refinancing your mortgage if you haven't locked in the low rates available now. You can put the money you free up into savings.

Set a goal for college savings. Talk about a squeeze play. At the same time that you're funding your own retirement, you're also expected to stretch to cover college bills. But you could aim for, say, three years at a public school or two years at a private school and figure on paying the rest out of current income, or have your student kick in summer earnings. To run the scenarios, use the college-cost calculator at Savingforcollege.com. To meet 50% of the total cost of four years at a public university, based on the current average annual cost ($17,131) and a 6% inflation rate for college costs, you'd need to save $222 a month for 18 years, assuming a 7% annual after-tax return on your college savings fund. If you covered half of only the tuition bill, you'd need to save $107 a month.

As for which account to pump money into, your best bet is usually a state-sponsored 529 savings plan, which lets your savings accumulate tax-free. If you use the withdrawals for qualified educational expenses, such as tuition and fees, the earnings can be withdrawn tax-free as well. About two-thirds of the states also offer a tax benefit for contributing to a 529 plan. A Roth IRA is also a good way to save for college. Earnings can be withdrawn penalty-free (but not tax-free) before 59 1/2 if you use the money for college expenses.

Here's the penalty for procrastinating on both those fronts: If you had started saving for retirement in your twenties, you would have had to carve out 13% of your salary every year to replace your income in retirement, according to an analysis by T. Rowe Price. Now, at 45, you'll need to sock away 29% of your salary to catch up. (And if you put it off until age 55, you'll need to save 43%, which won't leave you much for groceries or gas.) Uncle Sam gives the procrastinators of the world a powerful incentive to save: Once you're over 50, you can contribute significantly more to your 403(b) or 401(k) plan than your younger colleagues.

Adjust the college plan. The same time-and-money crunch applies to college savings. Compare the difference between starting a college fund when your child is a toddler and when he or she is 13. Fifteen years out, you would have had to save $345 a month to cover 75% of the cost of a public college education, according to Savingforcollege.com. At this stage—say, five years out—you'll have to save $646 a month, almost twice as much. Rather than regret the past, recalibrate. If you're on track for retirement but short of your college goal, for instance, you can always redirect 1% or 2% of your gross income from one pot to the other for a few years. Recognize that you might have to work a year or two longer before retirement or boost the retirement allocation after you're done paying the college bills.

Or consider borrowing—judiciously. Parent PLUS loans, sponsored by the federal government, carry a fixed 7.9% rate. PLUS loans let you borrow up to the cost of attendance, minus any financial aid. Remember, however, that borrowing on behalf of your student can jeopardize your own financial security in retirement. If the gap is a chasm, not a crevice, find a cheaper school. Another way to get cash for college is to borrow against the equity in your home. With a home-equity loan, you pay a fixed rate (recent average: 6.4%) but borrow the entire amount upfront. With a line of credit, you pay a variable rate (recent average: 5.1%) and borrow as needed. With both, you can generally deduct the interest on amounts up to $100,000, no matter how you use the money.

Talk turkey with your kids. No matter how you plan to pay for college, let your kids know what you're prepared to do before you make up a college wish list. Be clear that if the net price after financial aid doesn't end up at your number, it has to go off the list. Without that conversation, you'll be hard-pressed to say no when the acceptance letter from Vassar comes.

Invest what's left. If you're among those who have college covered (or don't have college costs to contend with) and you save the max in your retirement accounts each year, you may be looking for ways to invest excess income. One option is to add tax-free municipal bonds to your fixed-income allocation. Despite recent reports, most state and local governments have shown resilience in the face of budget cuts. Or take advantage of low interest rates and bottoming housing values to invest in real estate, Yrizarry suggests. If your student is heading off to college, you can accomplish multiple goals (and take advantage of a strong rental market) by buying a condo near campus and letting your kid and a few roommates live in it. Later, you can rent the property to other students or to alums during big sports weekends, generating income before and into your retirement.

At this point, retirement isn't a far-off goal you'll worry about someday when you're ready for your second hip replacement. Unless you plan to work until you drop, retirement is staring you in the face.

That means it's time to get deadly serious about saving, especially if you haven't saved enough. And that's true for most people: Nearly a third of Americans age 55 and older have saved less than $10,000 for retirement, according to the Employee Benefit Research Institute. Only 22% have saved $250,000 or more.

With any luck, though, these are still your prime earning years, and some of your major expenses—such as a down payment on a home and college tui­tion—are behind you. To make sure you're on track, don't hesitate to seek help from a financial planner or use the many resources available on the Internet.

Take advantage of catch-up contributions. Once you're 50 or over, you can contribute thousands more to your 401(k) plan than your younger colleagues. Read more about the current contribution limits here.

Dare to downsize. You may have hoped to move to smaller digs as soon as the kids were grown (and the boomerangers departed). But some homeowners who have seen the value of their homes decline in recent years are reluctant to sell until the real estate market rebounds. Even if your home hasn't returned to its former value, moving to a smaller home could save you thousands of dollars a year in taxes, utility costs and insurance. That's money you can funnel into retirement savings.

Consolidate your orphaned 403(b) or 401(k) plans. You've probably changed jobs several times, and you may still have money in former employers' plans. Leaving money in a former employer's plan isn't as bad as cashing it out. But as you approach retirement, it's a good idea to consolidate your savings in one IRA with a low-cost financial institution. You'll get a better handle on how much money you have and where it's invested. You'll also have more fund choices, and you may pay lower investment fees. Once you start taking withdrawals, it will be easier to take them from your IRA than from a former employer's plan.

Consider long-term-care insurance. A well-funded retirement savings plan could be decimated in a matter of months if you end up in a nursing home or require round-the-clock home health care. Medicare doesn't cover the cost of long-term care, and Medicaid isn't available until you've spent down most of your savings. Long-term-care insurance could prevent this from happening, but make sure it fits your budget. You'll have to pay premiums for many years, and the cost of those premiums could increase mightily as insurers are confronted with the cost of providing long-term care to millions of aging baby-boomers.

Weigh your Social Security options. You're eligible to file for Social Security benefits when you turn 62, but if you do, your monthly check will be reduced for the rest of your life. You may have little choice if you are out of work or in poor health and need the money to pay expenses. But if you have the wherewithal to work a few more years or have other sources of income, delaying checks until at least age 66 will increase your monthly benefits by 33% or more. That's not the only way working longer could boost your payouts. Your benefits are based on your highest 35 years of earnings. If you're a highly paid employee, working longer could displace some of your lower-earning years. Earlier this year, the Social Security Administration introduced an online tool that allows you to review your earnings record and get an estimate of your benefits. You should review this record annually, because unreported or underreported earnings could reduce your monthly payments. To get your online statement, go to www.ssa.gov/mystatement.

Reassess what you'll spend in retirement. Most boomers, greatly underestimated how much they'll spend when they retire. While you may save on dry-cleaning and commuting costs, you'll still need to pay for groceries, utilities and gas. If you refinanced to take cash out of your home, you may still have mortgage payments. And even after you're eligible for Medicare, you'll spend a lot of money on health care costs. Fidelity Investments estimates that the average 65-year-old couple will spend $240,000 on health care in retirement. Still convinced you can live on less? Try living on your projected retirement income while you're still working. This exercise will force you to cut back on spending, which means you'll be able to save more. And at this point in your life, saving is one of the few things you can control.