By Walter Updegrave
Q. I'm in my late 40s, single, and have no idea of how to prepare for retirement. My employer offers health insurance, but no retirement plan. I don't want to have to rely just on Social Security. Please help. -- Maria, Ohio
A. The fact that you're getting a late start makes retirement planning more of a challenge. The lack of a 401(k) or similar plan at your job doesn't help either.
But let's look on the bright side. You know that you've got to start doing something and you seem ready to begin. You also have a good 20 or so years to build a nest egg. So if you get started now -- and I mean pronto -- you can still dramatically improve your retirement prospects and avoid ending up dependent on Social Security alone after your retire.
Your first move: Open an IRA at a mutual fund company and fund it for the 2012 tax year. That's right, if you contribute to an IRA before the tax filing deadline of April 15th, you can stipulate that the money count toward the 2012 tax year. The maximum contribution for 2012 is $5,000. (People 50 and older can make an additional $1,000 catch-up contribution). If you can't sock away the max, do as much as you can.
Unless you think you'll face a higher tax rate in retirement than you do now -- doubtful in your case given that you're getting a late start with saving -- you're probably better off doing a traditional IRA and taking the tax deduction rather than doing a Roth IRA and foregoing the deduction in return for tax-free distributions down the road.
But don't get hung up on this issue. What's most important is that you fund some type of IRA account before April 15th. Besides, you always have the option of converting all or a portion of a traditional IRA to a Roth IRA later on.
Similarly, don't obsess about how to invest your IRA funds. If you don't already have a plan for how to build a diversified portfolio, I suggest you just invest in a target-date retirement fund offered by one of the fund companies on our MONEY 70 list of recommended funds. That will give you a fully diversified portfolio of stocks and bonds that will become more conservative as you age.
Once you've funded your IRA for 2012, start contributing to your IRA for the 2013 tax year as soon as possible. The maximum for 2013 is $5,500 (plus $1,000 for anyone 50 and older). Getting an early start on your 2013 contribution will not only give your money more time to grow. It will also reduce the chance that you'll forget to contribute altogether or, if you put it off until the last minute, that you may not have the necessary dough.
Continue feeding your IRA annually and you can end up with a pretty decent pile of retirement savings. For example, if you contribute $5,500 a year for the next 20 years and earn a 6% annual return, you'll have a nest egg worth nearly $215,000 by your late 60s.
Actually, you could accumulate plenty more. The maximum regular contribution adjusts upward with inflation, plus you'll be eligible to do the catch-up contribution once you hit age 50. So if you have the spare cash, you should be able to contribute more than $5,500 annually for most of the years between now and retirement.
Or course, you may not be able to do the max each year. But any amount you contribute is better than doing nothing at all. And the more you manage to save, the better off you'll be. The second thing I recommend you do is look for a job with a company that offers a 401(k) -- ideally, one that kicks in matching funds to complement your contributions. Saving for retirement through a 401(k) has several advantages.
Contributions to your 401(k) account are automatically deducted from your paycheck, which makes it much more likely you'll actually save. 401(k) accounts also have a higher contribution ceiling than IRAs -- $17,500 this year, plus a $5,500 catch-up for people 50 and older (although employers can set lower limits). And then there's the possibility of getting employer matching funds, which can further increase the eventual size of your nest egg.
I realize there's no guarantee you'll be able to find a job that offers a 401(k), not to mention one that will match (although most plans do). But since access to a 401(k) can dramatically improve your retirement prospects, it certainly makes sense to try.
You'll want to monitor your progress by going to an online retirement calculator and plugging in such information as your current retirement-account balances and the amount you're saving each year.
As you get nearer to retirement, you may also find there are other moves you can make to enhance your post-career standard of living, including postponing retirement a few years, working part-time or relocating to an area with lower living costs.
For now, though, the single most effective thing you can do to increase your chances of having a secure and comfortable retirement is to start saving -- and the best way to do that is to open that IRA ASAP.
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