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New tax rules place nest egg within reach

You're 50 and you haven't saved a dime for retirement. Unless something changes, you risk spending your golden years working as a Wal-Mart greeter to make ends meet.

If that applies to you, your situation may not be as hopeless as it appears.

True, you have less time to amass savings and less time for your savings to grow than a young investor. Assuming a 7 percent rate of return _ which means your money doubles every 10 years _ a dollar saved in your 20s will be worth almost eight times as much at retirement age as a dollar saved in your 50s.

However, Congress threw a life preserver to older spendthrifts when it passed the new tax law this year. Changes to retirement-savings rules will allow all savers, starting next year, to sock away more money in their tax-deferred accounts. Lawmakers particularly spiced up the changes for older workers, giving them special "catch-up" features that allow them to save additional cash starting at age 50.

How important are these changes? A 50-year-old worker taking full advantage of these stepped-up savings opportunities over 15 years could accumulate nearly $750,000, according to computations by T. Rowe Price, the Baltimore mutual fund and retirement-services firm. Save until you reach 70, and the money masses to almost $1.38-million.

Sounds too good to be true? Perhaps. T. Rowe Price is assuming that you earn a 10 percent average annual return on your savings. To achieve that, you'd pretty much have to put all your money in stocks and hope that the stock market delivers its traditional long-run performance of about 10 percent a year. With today's high stock valuations, at least by historical levels, that seems like a risky bet for a fiftysomething investor. After all, unlike a younger investor, your portfolio won't have a lot of time to recover if the market tanks.

So, a more realistic assumption may be that you earn an 8 percent average annual return on your money, which could be achieved through a mix of stocks and bonds. Even with that more modest expectation, Christine Fahlund, a senior financial planner at T. Rowe Price, calculates that you'll amass a nest egg of $500,000 by age 65. That won't make you Warren Buffett, but it still could lay the foundation for a relatively comfortable retirement.

The bad news is that you'll have to save like the dickens to get there. T. Rowe Price assumes you'll save as much as $26,000 a year when the next tax law is completely phased in. That means maxing out your IRA account, currently capped at $2,000 a year, but which rises to $5,000 a year by 2008. Workers over 50 can take advantage of "catch-up" provisions that will allow them to kick in an extra $500 a year beginning next year, and as much as an additional $1,000 starting in 2006.

But the big money will come through your 401(k) account. Currently, individuals can contribute no more than $10,500 a year to a 401(k), not counting any company match. The new tax bill will lift this limit to $11,000 next year, and escalate by $1,000-a-year increments to $15,000 by 2006. Again, workers over 50 can employ catch-up rules that will allow them to set an extra $5,000 a year by 2006, or a total of $20,000 a year.

Some big wage earners can save that much without breaking a sweat. It could be a question of not taking that fancy vacation each summer or not buying a new car every year or two.

For many 50-year-olds, however, saving $25,000 a year will seem impossible. If that fits your situation, you need to take a hard look at slicing your expenses. Spending less has a double benefit: First, it'll free up money for saving. Second, slicing your expenses means you'll be used to living on less money when you retire.

Here are some areas where you can achieve big savings.

+ Scale down your house. You often can unlock substantial cash by selling a big house and moving into a smaller home. Or you can move from a high-cost area, like New York, to a low-cost area, like Texas. Either way you can free up thousands of dollars a year that can be funneled into your retirement account.

+ Redirect education dollars. Savers in their 50s often see a large financial burden lifted from their pocketbooks when children graduate from college. Instead of shuffling that cash into a material purchase like cars or vacations, "you're in a position to really create a cushion for yourself" by investing all or a big part of that outlay, says Ed Slott, a Rockville Centre, N.Y., accountant and editor of the IRA Advisor, a monthly newsletter.

+ Trim your insurance bill. Joyce Franklin, principal at San Francisco's Franklin Financial Advisors, recommends that clients steer clear of expensive whole-life insurance policies _ which tend to be an inefficient savings vehicle _ and instead buy cheaper term insurance. In addition, as you approach retirement, you can cut the amount of your coverage. After all, if your children are grown up, you don't need as much coverage as a young wage earner with young children.

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