Retirement: 10 years to go, no savings

NEW YORK (Money) -- Question: My husband and I are retiring in 10 years, but haven't set up any retirement accounts. We need some advice on what we can do in such a short time. Any suggestions? - Debra, Bakersfield, Calif.

Answer: Wait a minute. I don't get it. How can you say with such certainty that and your hubby are retiring in 10 years when you apparently haven't saved a dime up to now?

I'm afraid Social Security will get you only part of the way (check out thebenefit calculators on Social Security's Web site to get a sense of what monthly payments you can expect).

Similarly, your home won't be as much help as some people think. If you own a home, you've probably seen its value climb by 40 percent or so over the past five years, even much more in some hot housing markets (although you may very well end up giving some of those gains back, at least temporarily).

Tapping that equity by, say, taking out a reverse mortgage can definitely generate some extra income. Today, for example, a 65-year-old couple whose home is worth $220,000 - roughly the median price for U.S. home - might qualify for a lump sum of cash or line of credit of roughly $110,000, or get monthly payments of $675 for life by doing a reverse mortgage. (The amount varies depending on factors such as where you live, the value of your home after outstanding debt against it, your age and the level of interest rates. To see how much you might qualify for today, click here.)

But as comforting as those figures may seem, remember that they assume there's no debt outstanding on the house. And they also assume interest rates at today's relatively low levels. If you still have a mortgage (or are running a balance on a home equity line of credit) or if interest rates rise, the amount of income you can get from a reverse mortgage can drop precipitously.

I'm not trying to be discouraging here. Regular readers of this column know that I believe that no matter how precarious one's finances may be approaching retirement there is always some way to improve your situation.

But you've also got to be realistic. Which means you're going to have to really commit yourself to building a retirement nest egg or most likely reconcile yourself to scaling back your lifestyle in retirement. In fact, you may have to do both.

But let's accentuate the positive now and concentrate on what you can do over the next 10 years or so to get you into better shape for retirement. Here are the three most important steps you need to take.

The first thing you've got to do is get a sense of how prepared (or unprepared) you actually are for retirement. Essentially, you want to get an estimate of what sort of savings you'll need to generate between now and the time you retire so that income from those savings combined with Social Security, any pensions you might have plus potential income from home equity can support you in retirement.

You can do this sort of analysis by going to our Retirement Planner or to Fidelity's myPlan Retirement Quick Check. (Both are free, but you'll have to register to use Fido's tool.) Or you could have a financial adviser crunch the numbers for you.

When you do the analysis I recommend above, I think you'll find that unless you start really socking it away, you may be in for a downsized retirement. So do whatever you must to start saving as much money as you can immediately. You can't make up for an entire career of not saving by ramping up your effort in the last 10 years.

But 10 years is enough time for you to make an appreciable difference in your retirement lifestyle.

If you save $500 a month for the next 10 years and earn an 8 percent annual return, for example, you'll have a retirement kitty of more than $90,000 before taxes. If you can manage $1,000 a month, you're talking $181,000. Neither sum is enough for living large. But both are better than going into retirement with nothing stashed away.

So make an all out effort. Contribute the max to your 401(k) or other retirement plans at work and try to fund an IRA account as well. If you're over 50, which I assume is the case for you, don't forget that you can also throw an extra $5,000 into your 401(k) and $1,000 in an IRA in catch-up contributions.

And if you can put away more money in taxable accounts, do that too. Might I suggest having money go directly from your checking account into a mutual fund?

By the way, don't try to invest too aggressively to make up for lost time.

That approach could backfire and leave you nursing big losses. At the same time, though, you can't take a laid-back approach. If you're in your late 50s or early 60s, you probably want to keep roughly 60 percent to 65 percent of your portfolio in stocks until retirement time, at which point you can dial it down to 55 percent or thereabouts and then gradually scale back your equity exposure until you've got about 30 percent or so in stocks by the time you're in your late 70s.

I know you want to retire in 10 years. But does that really make sense if it means you and your husband will be scraping in the stage of life that these days is often the opportunity to fulfill the dreams and aspirations you may have put aside during your career?

You'd be surprised how much working just two more years can improve your financial prospects in retirement. Your nest egg will have more time to grow, you'll be able to add more new money to it and the chances it will be able to support you better throughout retirement will increase because you'll be drawing on it for fewer years. What's more, by collecting Social Security at a later age, you can potentially increase the monthly payment you'll receive by a third or more.

And while you're at it, consider working for pay part-time when you eventually do retire. The extra income will take some of the pressure off your retirement portfolio, and the work will probably make you feel more socially connected and engaged. That's a win-win.

Following this plan won't put you and your husband in the same shape you would have been in had you started planning and saving earlier in your careers. But doing so can dramatically improve your prospects from where they stand today. So don't procrastinate a minute longer. The sooner you get started, the more enjoyable your retirement will be.

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