How to Retire Rich: Smart Steps at Ages 30-45

Kiplinger: How to Retire Rich

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 always withdraw your contributions from a Roth tax- and penalty-free, but if you're buying your first home, you can take up to $10,000 of earnings tax-free, too, as long as you've had the account for at least five years.

You can usually borrow against your 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. "If it gets you into the home you want and need," says Yrizarry, "it's an effective use of your money."

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.

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How to Retire Ri... At this stage of your life, your most valuable asset isn't youthful vigor or a full head of hair. It's time. Because you're decades from retirement, contributions to a 401(k) or other retirement plan will have years to compound and grow. Even a modest contribution now will pack a much greater wallop than a significantly larger contribution when you're in your forties and fifties.

If you start socking away $200 a month in a retirement account from the moment you land your first full-time job at age 22, within ten years you'll have a stash of more than $37,000, assuming your investments grow 8% a year. In 20 years, you'll have more than $122,000, and by the time you reach age 67, your nest egg will be worth $1.2 million.

Stuart Ritter, a certified financial planner for T. Rowe Price, recommends investing 15% of your salary toward retirement. That may seem like an unreachable goal for young people with other demands on their paycheck. If you're pulling in $30,000 a year, for example, that's $375 a month. But with tax breaks associated with employer-sponsored retirement plans, plus a possible employer match, you can reduce your actual out-of-pocket contribution. Even a smaller contribution will give you a serious head start on saving, so you'll have a bigger stash that can grow for decades -- plus more wiggle room to deal with the competing demands on your paycheck later on.

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How to Retire Ri... Enroll in the 401(k). Most major companies that offer 401(k) 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, says Ted Sarenski, a certified public accountant in Syracuse, N.Y. "You're not going to get that kind of return anywhere else."

In addition, the money that you contribute to your 401(k) is excluded from taxable income. Once you take the tax break into account, a 6% contribution "only feels like 4%," says Sheryl Garrett, president of Garrett Planning Network.

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How to Retire Ri... Fund a Roth IRA if you don't have a 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, Sarenski says. 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 401(k) 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, including Schwab, will waive minimum investment requirements if you sign up for an automatic investment program.

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How to Retire Ri... At last, you've gotten your career on course and are ready for your next big moves -- perhaps starting a family and buying a home. Before you get too far down that road, map out a long-term plan, says Jim Oliver, a certified financial planner in San Antonio, Tex. "Most people live the lifestyle they want without putting away enough to meet the goals they want later on. It's like having a budget for a trip and not allocating it. Before the trip is over, they run out of money."

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How to Retire Ri... 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. "Debt is the number-one problem that sabotages most couples," says Deborah Fox, of Fox Financial Planning Network, in San Diego.

Before you have children, contribute as much as you can to your 401(k), but don't neglect the Roth IRA, says Barry Korb, of Lighthouse Financial Planning. "It's costing you in taxes now, but down the road, that money is tax-free. Do it while you can afford it." Keep contributing at least 15% of your gross income toward retirement savings, says Nicholas Yrizarry, of Wealth Management Group, in Laguna Beach, Cal. Once the kids arrive, you'll likely have to pull back if one spouse leaves the workforce or to pay for child-care costs. Either way, "the reality is you can't do 15% of gross income because it's not there anymore."

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More From Kiplinger:
5 Costly Retirement Surprises
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10 Most Tax-Friendly States for Retirees

The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
How to Retire Ri... 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 always withdraw your contributions from a Roth tax- and penalty-free, but if you're buying your first home, you can take up to $10,000 of earnings tax-free, too, as long as you've had the account for at least five years.

You can usually borrow against your 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. "If it gets you into the home you want and need," says Yrizarry, "it's an effective use of your money."

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.

(iStock)

More From Kiplinger:
5 Costly Retirement Surprises
10 Things You Must Know About Social Security
10 Most Tax-Friendly States for Retirees

The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
How to Retire Ri... By now, you've probably amassed a decent sum in your retirement accounts and another hefty sum in the college fund. You haven't? Join the club. A survey conducted in 2009 by Edward Jones, the financial services firm, showed that 20% of respondents ages 45 to 54 had saved nothing at all for either retirement or college. A recent survey showed that 62% of respondents had never heard of a 529 savings plan, much less contributed to one.

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 401(k) plan than your younger colleagues.

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The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
How to Retire Ri... 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, says Greg Dosmann, a principal at Edward Jones. 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. "It's a trade-off," he says.

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. Thanks to their fixed rate and consumer protections, such as forgiving the loan if the student dies or becomes disabled, PLUS loans are generally a better bet than private student loans.

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.

A lower rate and tax-deductible interest may beat student loans. The downside to this strategy is that it pushes off a key goal for many people, which is to enter retirement mortgage-free. "After the kids are finished with college, you are going to have to save like heck to pay off the mortgage or, if you can't do that, sell the house and downsize when you retire," says Yrizarry. Downsizing doesn't have to be a bad thing, but it's a decision you should make before you borrow, not after.

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The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
How to Retire Ri... 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,” says Fox. Without that conversation, you'll be hard-pressed to say no when the acceptance letter from Vassar comes. "College is not just a financial decision," says Fox. "There's a whole emotional side. You have to have the guidelines established before you get to that point."

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5 Costly Retirement Surprises
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The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
How to Retire Ri... 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. "With our clients, the last ten years that they work is when they save the most money," says Mark Bass, a certified financial planner in Lubbock, Tex. 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.

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More From Kiplinger:
5 Costly Retirement Surprises
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The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
How to Retire Ri... 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. For 2012, you can contribute an additional $5,500 over the annual limit of $17,000, for a total of $22,500. Any employer contribution on top of that is gravy.

Don't stop there. You can also make a $1,000 catch-up contribution to an IRA, for a total contribution of $6,000 in 2012. Unlike with a traditional IRA, you don't have to take annual minimum withdrawals from a Roth once you turn 70 1/2. There are, however, income limits on Roth contributions. You're eligible if your modified adjusted gross income is less than $125,000 ($183,000 if you're married and file jointly).

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More From Kiplinger:
5 Costly Retirement Surprises
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10 Most Tax-Friendly States for Retirees

The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
How to Retire Ri... 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, says Michael J. Nicolini, a certified financial planner in Elkhart, Ind. 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.

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More From Kiplinger:
5 Costly Retirement Surprises
10 Things You Must Know About Social Security
10 Most Tax-Friendly States for Retirees

The opinions expressed are solely those of the author and do not necessarily reflect the views of Comcast.
QUIZ: Are You Sa... Click here to see if you'll have enough for a comfortable retirement.