Retirement Planning: What to Do Now

• Figure out if you’re saving enough
• Consider a professional tuneup
• Keep faith in stocks
• Investment allocation: For someone 25 years from retirement, T. Rowe Price’s target retirement fund invests 90 percent in equity and 10 percent in fixed income. (Experts differ on the precise allocation of retirement investments; T. Rowe is on the aggressive side.)

By the time you hit your 40s, you’ve probably been socking away money in 401(k)s and IRAs for at least 10 years. Now it’s time to figure out if you’re saving enough to retire when you want. Use a sharp online retirement calculator; in MoneyWatch’s analysis of six retirement-planning calculators, T. Rowe Price’s version got high marks. Be sure the calculator’s assumptions reflect your situation. For example, T. Rowe Price’s presumes you want to live on 70 percent of your pre-retirement income annually once you quit work. “You have to decide what is right for you; it may be 70 percent, it may be 100 percent,” says Chuck Gibson, founder of Financial Perspectives, a Newark, Calif., advisory firm.

If the calculator exercise leaves you feeling less than secure, ratchet up your savings rate. Already at your saving limit? Then commit to funneling half your future raises and bonuses to retirement savings. If you’ve maxed out on your 401(k) — this year’s limit is $16,500 if you’re under 50 — fund an IRA, deductible if you meet the requirements, non-deductible if you don’t. If you’re saving up to the IRA limit ($5,000 for people under 50 in 2009), open a taxable account for additional retirement savings. Use low-cost index mutual funds or ETFs to minimize taxes while your money is invested. Bonus: when you start withdrawing, you’ll pay capital gain taxes (currently 15 percent) as opposed to ordinary income rates.

You might consult with a financial adviser for a second opinion on your retirement planning. Hire a fee-only planner or adviser who charges on an hourly basis or with a flat project fee. Figure on paying $1,000 or more. No, it’s not cheap, but you are entering a crucial period in your financial life: You have time to make up for past mistakes, but not so much room for error in the coming years. Ask friends or family for referrals, or search for fee-only planners at the Web site of the National Association of Personal Financial Advisers. Be prepared to talk about more than your 401(k) investment choices; a good advisor will delve into how your income, spending and debt play into your retirement plan, and will take a comprehensive look at your financial situation.

After 2008’s bruising bear market, which pummeled 401(k)s and IRAs, it’s natural to be skittish about investing in stocks for retirement. But don’t ignore another very real risk: that your savings won’t grow at a rate outpacing inflation. “It’s not just a matter of the 20 or 25 years until you retire, but there’s another 20 or 30 more years in retirement where inflation is going to be a risk, too,” says Frank Armstrong, president of Investor Solutions, a Coconut Grove, Fla., advisory firm, and author of The Retirement Challenge: Will You Sink or Swim?

• Accelerate your savings
• Give your career a tuneup
• Check out long-term-care insurance
• Size up Social Security and pension benefits
• Start thinking about where to retire
• Investment allocation: For someone 15 years from retirement, T. Rowe Price’s target retirement fund invests 79 percent in equity, 20 percent in fixed income and 1 percent in short-term income.

With the destination closing in, you should now turbocharge your saving as though you’ll retire in 10 years, not 15. This way, you’ll have insurance in case things don’t work out as planned. Take advantage of so-called “catch-up” retirement plan contributions for people 50 or older; in 2009, the law entitles you to an extra $5,500 more in your 401(k) above the normal $16,500 limit. Do this between age 50 and 60 and, if you earn an average annualized 7 percent, at 65 your 401(k) will be $113,000 fatter than if you had put in just $16,500. You can also bump up your IRA by $1,000 a year if you’re 50 or older, to a maximum contribution of $6,000 for 2009. “Even if you don’t run into any problems, saving more while you can just means you’ll have more money saved earlier,” says Bob Carlson, editor of the Retirement Watch newsletter and author of The New Rules of Retirement. “That will give you more options as you approach retirement.”

At this age, your high salary and benefits can make you easy pickings for the downsizing squad. Or perhaps you’re just dangerously close to burning out. Either way, it is increasingly common for pre-retirees over 50 to switch jobs. So now’s the time to prep: Keep your skills fresh so you can nail a new job after 50.

For healthy people in their 50s, the prospect of shelling out annual premiums for long-term-care insurance can be painful — a lot of money spent on something you may never need. But consider this: a 65-year-old has a 70 percent chance of needing long-term care at some point. A three-year nursing home stay in a semi-private room costs about $200,000 today; in 20 years, it’ll run more than a half-million dollars assuming health care costs rise 5 percent a year. If you have ample retirement assets, you may opt to self-insure and pay for any care out of your own pocket. But if your retirement stash can’t cover that potential tab, check out MoneyWatch’s advice on buying a long-term care insurance policy.

Have you been paying attention to the annual statement you get from the Social Security Administration that forecasts your future retirement benefits? If not, head over to the SSA Web site and request a statement so you can verify that you’ve been properly credited for your earned income. If there are any problems, you’ll want to sort them out long before you’re ready to begin receiving Social Security checks. Same goes for any employer pensions, if you’re lucky enough to have one coming (fewer than 20 percent of today’s workers are). Track down future pensions from former jobs and make sure they have your updated contact information.

If you think you might want to relocate in retirement, now is the time to suss out the possibilities. Maybe you’ve got your eye on a vacation spot that you will live in year-round. Then visit it during the off-season. You don’t want to replant your roots only to find you’re miserable six months of the year. For some ideas about great places to retire, read MoneyWatch’s rating of the best retirement spots.

• Pay off your mortgage
• Buy long-term-care insurance (maybe)
• Consolidate your accounts
• Investment allocation: For someone 10 years from retirement, T. Rowe Price’s target retirement fund invests 72 percent in equity, 25 percent in fixed income and 3 percent in short-term income.

More than 40 percent of people 65 to 74 have a mortgage, according to the Employee Benefits Research Institute. If you’re one, try to get that loan paid off as soon as possible to relieve financial pressure when you stop bringing in a paycheck. A recent study by the Center for Retirement Research at Boston College concluded that for most pre-retirees, paying off the mortgage is a smart financial move and delivers a nice psychic security blanket too.

If you’re planning to buy long-term-care insurance, age 55-60 is the sweet spot for purchasing a policy. Wait any longer and you run the risk an illness may result in a prohibitive premium or disqualify you entirely; buy it earlier and you’re signing on for too many years of steep premiums.

You’re nearing the magic age 59 milepost; the time when you can begin taking withdrawals from your 401(k) and IRAs without incurring a 10 percent early-withdrawal penalty. In anticipation of heading into your drawdown years, corral all your retirement accounts into a few more-manageable uber-accounts. This way, you won’t waste time in retirement trying to stay on top of all your separate required minimum distributions. So, move 401(k)s from jobs past into one rollover IRA and do the same with those itinerant IRAs you collected like trophies back in the 1990s. Traditional IRAs can also be streamlined into one pot, Roth IRAs into another. If you have an old 401(k) with a big lump of company stock that appreciated in value significantly, speak with your tax adviser before doing a rollover. You may save boatloads of tax by taking advantage of a quirky IRS rule known as Net Unrealized Appreciation (NUA).

Consolidating is also a great opportunity to ensure you have your retirement accounts with a low-cost provider. In an investment world where an annual 7 percent market return is supposed to be enticing, reducing your expenses means keeping a lot more of that 7 percent for yourself.

• Decide when to start receiving Social Security
• Road test your retirement spending
• Build the cash kitty
• Investment allocation: For someone 5 years from retirement, T. Rowe Price’s target retirement fund invests 64 percent in equity, 30 percent in fixed income and 6 percent in short-term income.

Beginning at age 62, there’s an eight-year window for when you can start receiving your Social Security benefits. Each year you delay between 62 and 70 increases your eventual benefit by 8 percent. If you have a serious illness or a family history that make it unlikely you will live into your ‘80s, delaying your benefit might not be advantageous. But for everyone else, waiting for the higher benefit is a hedge against depleting your savings. Delaying the checks is especially useful for married couples where the husband will have the higher benefit. “We know statistically that it is the husband who dies first. So if the husband delays to 70, his wife will be entitled to a survivor’s benefit that is a lot more than if the husband took the benefit earlier,” says Melanie Pelayo, a CFP at Financial Perspectives. The Social Security Web site walks you through the variables to consider, and you can use the site’s Retirement Estimator to see the different payouts you could get at various ages.

By now you know your target budget — the percentage of your annual pre-retirement income you expect to live on in retirement. If you decided you would be able to live on 80 percent, put yourself to the test and live on just that amount for a full year before retirement. “People tend to find that they can’t live on what they thought they could,” says Bud Hebeler, whose analyzenow.com Web site has free retirement planning worksheets.

Set aside in cash and short-term bonds money you’ll need to cover living expenses for roughly the first five to 10 years of retirement. “That’s how you avoid being wiped out when the stock market goes down,” says Armstrong. Plan on maintaining that cushion throughout retirement. You’ll probably need to move more money from stocks into cash and bonds every few years to replenish what you’ve spent. As counter-intuitive as it may seem, you should sell more stocks after a good year in the market (i.e. sell high), so you’re not forced to liquidate after a bad year, such as 2008.

• Meet with H.R. about your benefits
• Lock in health insurance coverage
• Review your beneficiaries
• Investment allocation: For someone about to retire, T. Rowe Price’s target retirement fund invests 55 percent in equity, 35 percent in fixed income and 10 percent in short-term income.

It’s critically important to sit down with your Human Resources rep, if you have one, to walk through every benefit you’ll receive when you stop working — from health insurance to retirement accounts. If you have a 401(k), once you retire you can leave the money where it is (if you have at least $5,000 in the account) or roll it over into an IRA. If you will receive an old-fashioned pension, you’ll need to choose how you want your benefit structured. You can opt for a periodic payout based on your life expectancy that will end at your death or, if you’re married, a reduced periodic payout that will continue to be paid to your spouse if he or she survives you.

Medicare kicks in at age 65, but if you’ll retire before then, be sure you have bridge insurance. Ideally your last employer will cover you until age 65. If not, look into an individual policy. It will be costly given your age, but going naked is even costlier.

Since there’s plenty Medicare does not cover, unless you have extremely generous retiree health insurance benefits, look into purchasing a private Medigap policy. Apply during the first six months after turning 65 and no insurer can deny you coverage based on a pre-existing condition.

Make sure every one of your investment accounts — from pensions to IRAs — has up-to-date beneficiaries assigned. While you’re at it, give your entire estate plan a checkup to ensure that it reflects your current situation. Setting up your loved ones financially just might be the best move you can make.

More on MoneyWatch:

• Retirement Report Card: Are You Saving Enough?
• Retire When You Want To
• What To Do With Your 401(k) Now
• Can Baby Boomers Retire?
• The Payoff From Retiring Later