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Waking up screaming for savings

James Stehr woke up with a sinking feeling one day when he was 47. Jeesh, he thought. I'm pushing 50 and I haven't saved a cent for retirement.

That's a midlife crisis, '90s style. Plenty of baby boomers in their 40s and 50s aren't lusting after red convertibles, hot babes or lost opportunities to start a major corporation in their garage.

They are waking up to the nagging fact that they have only 10 or 20 years to save for retirement. They have been too busy paying for everything else _ a home, medical bills, child care. Or, like Stehr, an architectural consultant, they have been putting kids through college, have gone through a divorce or are self-employed.

If you can overcome the temptation to say, "Ah, the heck with it. . . . It's too late _ I'll never catch up," you can still make a huge difference in your standard of living in retirement.

On the plus side, you are probably in your peak earning years. And you still have time on your side. Consider: If you are in your 40s, you have 20 to 25 years before you retire, and another 20 to 30 years in retirement. (It's not as if the savings clock stops when you hit 65.) That's 50 years in which your savings could grow and compound.

If you are able to save, say, $100 a week, in 20 years you will have $297,830, assuming a 10 percent return. Would you want to turn 65 with zero savings, or $297,830?

Realizing he had nothing to lose _ and a lot to gain _ Stehr started to plow as much as he could into savings. "I said, "Dammit, I'm going to make this a priority.' " He did. Now, after only eight years, he is ahead of his scheduled goal of retiring at age 66 with 70 percent of his preretirement income. He concedes that the bull market did half his work for him.

While late-starters can't count on 30 percent annual returns to bail them out in the future, they can take advantage of some major changes in the tax law that could do them just as much good. Some things to consider if you are just getting started:

DOWNSIZE YOUR HOME: If your home has appreciated greatly in value, consider selling it and moving to a less-expensive one now. The new tax law allows you to take as much as $500,000 in capital gains tax-free, which you can invest. (The old law allowed only a one-time exclusion of $125,000 in gains from a home sale.) You had to be 55 or older to qualify for that; under the new law, there isn't any age restriction. "The ability to downsize a home _ tax-free _ has become an enormously useful planning tool for late-starters," said David Walz, a fee-only financial adviser in Oak Park, Ill.

One of his clients, a professional couple in their late 50s, sold their home and used the gains to buy a smaller home, debt-free. Now the amount that used to go toward the monthly mortgage goes into savings. And the smaller home has lower property taxes, utilities and other expenses.

Walz notes that the new law allows people to take their gains tax-free after only two years in a new home. So this couple could conceivably sell their smaller home in a few years when they retire _ and again capture the gains tax-free.

RESTRUCTURE YOUR DEBTS: Even if you can't sell your home, consider refinancing your mortgage. Walz advised a woman in her 50s who, by refinancing, was able to free up a couple hundred dollars a month to invest for retirement. People with high credit-card debts might consider consolidating them under a home-equity loan, which could lower their payments and make their interest deductible.

CONTRIBUTE TO YOUR 401(k): If you have a 401(k) or any type of plan at work that lets you set aside pretax pay, contribute as much as you are allowed, if you can afford it. A 401(k) lets you put in up to $10,000 a year (the limit may be lower at your company). The contributions lower your taxable income. And if your employer matches a portion of your contributions, it's like getting a huge boost in your return. (A 50 percent match would be like getting a 50 percent return on your money.)

If you are a teacher or non-profit worker, take advantage of a major break some of these plans offer older workers: They let you make "catch-up" contributions that can be thousands of dollars more each year than the usual limits. Check with your employer.

PUT MONEY INTO A ROTH IRA: You can have a Roth IRA even if you are covered by an employer's retirement plan as long as your combined income is $150,000 or less ($95,000 for single filers). The $2,000-a-year contribution will grow tax-free. In 20 years, you will have $114,550, tax-free. If your spouse contributes too, you will have $229,100.

INVEST FOR GROWTH: Even late-starters have long-term investing horizons, which means they can take on the added risk of investing in stocks. Stocks will keep you ahead of inflation, which historically has run 3 percent a year.

But resist the temptation to bet on the riskiest investments in an effort to catch up. You can't afford that kind of risk. Lower-to-moderate-risk stock funds include equity income funds, growth and income funds, balanced funds and utilities funds.

TAKE STOCK: Even if you have saved nothing, you are probably not starting with zero. A middle-income couple in their mid-40s will receive roughly $30,000 a year in retirement from Social Security. (Ignore the hysterical predictions of the system's demise.) Currently, Social Security replaces approximately one third to 40 percent of average annual preretirement income for individuals who earn from $30,000 to $60,000 a year.

If that couple has managed to accumulate something by now _ whether it is in IRAs, pensions, home equity, a small business _ these assets could also generate income in retirement. To figure out how much your assets will generate, and how much you will need to supplement them, check out software programs such as Quicken, or Web sites includinghttp://www.smartmoney.com, http://www.vanguard.com and http://www.troweprice.com.

GET HELP: A good adviser can help you figure out how much you need to save, and can do a cash-flow analysis to see when you can squeeze out some money for savings (possibly by restructuring debt, consolidating or eliminating insurance coverage and downsizing your home or living expenses).

An adviser can also help you set up a SEP-IRA (a retirement plan for self-employed people) or Keogh if you're self-employed, check out your pension and figure out how much Social Security you are likely to get. For a list of fee-only advisers in your area, call (888) 333-6659, or check out the Web site: http://www.napfa.org.

AIM TO SAVE 10 PERCENT OF YOUR GROSS INCOME: Between your employer's savings plan and IRAs, try to save at least 10 percent of your pretax income. The 401(k) will be easiest because contributions will be taken automatically from your paycheck. To make saving for an IRA easier, set up an automatic-investing program in which a set amount, say $100, is shifted from your credit union or bank account into a mutual fund each month.

MAKE IT A PRIORITY: Don't wait until you have paid off debts or put the kids through college. Joan Chasan, a fee-only adviser in Framingham, Mass., notices that some people come up with an annual excuse why they can't save. "Maybe they want to fix up the house on the Cape. Maybe their daughter's getting married." There's always a good reason not to save; ignore it.

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