Retirement Saving In The Home Stretch

By: Polly Leider

In the final installment of The Early Show's three part series on retirement, financial contributor Ray Martin had advice on how to maximize your 401(k) when you are close to retirement.

When you are nearing retirement, it's time to start planning how much money you'll need for income.

The typical advice given is that today's retirees typically need an amount of retirement income that is at least 70 to 80 percent of their pre-retirement income.

How well are you doing? Take this simple test. Add up the value of your 401(k), IRAs and other savings earmarked for your retirement. You can also add to that sum the amount of home equity you will free up from the sale of real estate. When you get a final number, assume you will be able to draw five percent of this sum each year in retirement. So, if you'll have $200,000, you should be able to draw $10,000 from your retirement savings each year.

You also need to factor in that your retirement savings must last 20 to 30 years. That's how long a healthy 65-year-old is likely to live.

The problem is that the median 401(k) plan balance for workers aged 55 to 64 was $60,000 in 2004. By the measure above, such a balance would only provide about $3,000 a year of income in retirement, or only about $250 a month.

When it comes to managing a 401(k) plan account, workers nearing retirement need to think about their 401(k) plan differently than younger and mid-career workers. There are three areas that workers nearing retirement should get up to speed on: maximizing contributions, diversifying investment mix and planning for withdrawals.

401(k) contributions — maximize contributions and catch-up

Workers nearing retirement have only a few more years to make pre-tax contributions in their 401(k) plan. That's because after they leave their employer, they will no longer be able to contribute to their 401(k) plan account from payroll. Workers over age 50 can make total pre-tax contributions of $20,000 ($15,000 pre-tax contributions plus $5,000 catch-up contributions) to their 401(k) in 2006. But many workers do not do this.