SPECIAL MONEY GUIDE, THE RETIREMENT RACE

Bill and Joyce Cothey of Cleveland like to live large. They've remortgaged their home, taken vacations several times a year, reveled in new cars, and they're paying their youngest daughter's college tuition. What are they doing without? Retirement savings. "Zero, zilch, nada," says Bill, 54, a produce manager for a large grocery chain. "I never once thought about retirement and how we'd live."

They're thinking now, and so is the rest of the baby-boom bunch. As a group, they're earning (and spending) more than their parents did. Their net worth is higher, thanks to richer stock-market and real-estate values, but their lifestyle expectations are higher, too, and there's the rub. Only about half of boomer households are saving enough to preserve their working-age standard of living when they retire, the General Accounting Office reports. For the other half, living standards will drop unless they save more--much more--or work longer than they'd planned. Cothey has a union pension and expects to get Social Security. "But a sock with some money in it would be nice," he says.

Even the boomers who saved and invested have serious catching up to do. The long bear market slashed four years out of their money lives. Those who kept making regular contributions to their retirement plans should make up that lost ground pretty fast (except the tech-heads, who will be behind for years). Still, you're four years older now, with less time to play around.

I've gathered a few simple rules to help you get your retirement on track (more about that later). But first, we all have to face our fears about retiring broke. NEWSWEEK has compiled a number of portraits of people dealing--or not dealing--with retirement realities. If their stories help you get over the first emotional hurdles, you'll have successfully run the first lap in the retirement race.

WHAT, ME WORRY?

When "retirement" first starts sounding like a real word, it's common to go ostrich--dig your head right into the sand. Financial planners see it all the time. Bernard Kiely of Morristown, N.J., sits through many a talk with potential clients who come to his office and say they want to retire. "I tell them, 'Your spending is too high,' and they don't come back." Randy Kratz of Houston helped a couple work out a complex spending plan that entailed some sacrifice. "I never heard from them again, and they refused to pay the bill," he says.

Susan Eastman, 52, a journalist in Ft. Lauderdale, Fla., says that on her salary she can barely pay her bills, let alone save any money. Her retirement plan, she says, is "hope." (And, I might add, faith.)

By contrast, there's a Cleveland freelance writer who wouldn't let wishful thinking in the door. This "daughter of immigrants," she says, has saved 10 percent of every paycheck since she was 16. (Way to go!) She's building up serious money by never losing sight of the need to save.

Some people suffer because of the stubbornness of someone else. Scottsdale, Ariz., planner Sharlee Cretors is trying to help a woman, 42, married to a man 20 years her senior. He retired, ran through his IRA and won't put aside an extra nickel for her. She's saving as much as she can on a $36,000 salary, but isn't anywhere close to the nest egg she's going to need. Her predicament should resonate with married women. All of us need savings and investments of our own.

BETTING THE RANCH

People who'll need more money often dream of higher investment returns so they won't have to lower their spending. Planner Tom Orecchio of Old Tappan, N.J., recalls a visit from a retiree, then 62, whose portfolio peaked at $2 million in Janus funds and Cisco (at $80 a share). Orecchio advised him to diversify, but "that didn't play well." The retiree said he'd become a client when the value of his stocks reached $2.5 million--and you know the rest. He returned for another consultation with Orecchio, with Cisco down to $12, but remained absolutely positive that the stock would "bounce back." He thought that his biggest problem was how to tell his wife about the loss.

Marc Freeman, 52, of Fairfield, Iowa, describes himself as "a semiretired consultant looking for a full-time job." He lost millions of dollars' worth of stock options when the telecom he worked for folded. Then he blew through $3 million by speculating in high-risk stocks. Freeman says that he and his wife will need $100,000 a year to live on, for which he'll need a $2 million nut. He has $150,000 in savings and plans to make his pile in real estate.

But what are these speculators thinking? Angels don't bring us harps of gold. Magicians can't levitate JDS Uniphase back to $150 a share. When we lose enough money, the good life can move out of reach.

Working longer is usually the only answer to major stock-market losses. "Don't invest aggressively to try to catch up," says Michael Kitces, director of financial planning for the Pinnacle Advisory Group in Columbia, Md. "A risky plan that can't be sustained when the market fluctuates is not a plan." Bill Ramsay, head of Financial Symmetry in Raleigh, N.C., concurs. "Don't repeat past mistakes," he says. "Taking high risks is what led to the problem. Now isn't the time to 'double down'."

For some people, investments are totally off the table. They simply can't afford to buy stocks anymore. Cindy Perini, 50, of Del Ray Beach, Fla., who thought she had retirement aced, lost half her money in stocks. Then she was laid off and went through the other half. "I haven't gotten back to the salary I was making before," she says. "It's like I'm starting over." She's looking for a job with a matching 401(k), so she can begin--again--to put money away.

THE FEAR FACTOR

When you finally face facts, you may freeze like a deer in the headlights, unsure of which way to turn. Stacey Steffl of Allison Park, Pa., a divorced mother of three, says, "I get the hell scared out of me when I read articles that say you should be a millionaire by the time you retire. Who are they kidding?"

They're kidding a lot of people, unfortunately. The financial-services industry wants to scare the well heeled into giving it money to invest. (The barely heeled like Steffl are just caught up in the propaganda net.) "It's fear selling" and psychologically depressing, says Fred Brock, author of the valuable new book "Retire on Less Than You Think." Just look around you. People are living peacefully on much less than that, and so will you. Anyone can retire on a modest nest egg, especially if you move to a cheaper county or state and simplify your life.

Whatever your retirement resources, you'll eventually adjust your expenses to match the amount of money coming in. That's always how it's done.

LIFE'S SNAGS

You know, of course, that the earlier you start to save the longer your money has to grow. You also learn how easy it can be to save. But there's a third, less obvious reason for building assets early. Something unforeseen may knock any well-laid plans apart.

Take freelance photographer Bud Lee, 63, of Plant City, Fla. He suffered a stroke last year, and the cost of his care has exceeded what his schoolteacher wife's health policy will pay. They mortgaged their home to pay his mounting medical bills but recently took a more radical course. They divorced, so that Medicaid will pay for his physical therapy--and so that his wife, Peggy, won't have to pillage her retirement savings.

Joseph Ierna, 72, used to work for the Greater Hartford Chamber of Commerce. In the late '80s, the chamber switched from a fixed pension to a less generous 401(k). The Iernas salted away as much as they could in their 401(k), and retired with a tidy nest egg stored in stocks. Then the market plunged, forcing Joseph back to work--something that could hap-pen to any retiree. Fortunately, he was healthy enough to take a job and enjoy it. Not everyone is going to be so lucky.

Schoolteachers Linda and Steven Barron had their 2005 retirement planned to the last detail. But Steven died suddenly last year, just a month before reaching 60, the age at which he could have assigned his full pension to his wife. That didn't happen. So along with the pain of losing her husband, Linda qualifies for roughly half the money she'd expected, and the Barrons hadn't saved anything extra on the side. "When I go to the supermarket, I see all these older people bagging groceries," she says--praying that's not her fate.

There's another cautionary tale from Linda's life. Two daughters in college swallowed up the Barrons' discretionary income, and they helped support one daughter after graduation. "You sacrifice your own investments for the future because your kids come first," Linda says. Well, maybe not. That's another emotion you may have to get past. When flight attendants demonstrate oxygen masks, they tell you to "secure your own mask before attending to your children." It's the same with retirement, says Kitces. Unless you secure your retirement, your children may eventually be burdened with supporting you.

So these are the stages you have to pass, says Dan Roe of Budros, Ruhlin & Roe in Columbus, Ohio. "First denial, then depression, accompanied by crying at planning meetings. That's followed by a slow acceptance of the need to change, and finally finding enjoyment in the challenge of living a less materialistic life."

WINNING THE RACE

I've been running through problems to show you the risks of not planning ahead. But there are many success stories, too. Laura and Marty Keane, of St. Petersburg, Fla., have been saving for retirement the past 12 years. They know their specific goal--an income of $3,000 to $4,000 a month--and what they have to save to get there. They own a small office building and put $8,000 a year into a Simple IRA. "If Social Security survives, we should be OK with what we have," says Laura.

To put yourself on a solid retirement-savings path, here's what the planners propose:

Don't panic. Focus on what you can do today, not on what you could or should have done yesterday.

Promise yourself not to refinance your home again. In fact, raise your monthly payments to build more equity, fast. Your home is like a piggy bank. At retirement you can sell it, buy a smaller house or condo for cash and still have money in the bank to help pay your bills. You'll have spent that money already if you're still mortgaged to the hilt.

Spend less. Nothing works if you live on more than you earn. To save, you have to live on less, and if you're starting in midlife, the changes have to be serious. "In the grand scheme of things, cutting back on restaurant meals won't compensate for hundreds of thousands of dollars lost in stocks," says Kitces. You need to move to a less-expensive area, downsize into a smaller house and forgo vacations with five-digit price tags. Two good Web sites: bestplaces.net, which shows you how much more or less it costs to live in various cities, and retirementliving.com, which lists each state's taxes and gives you tips on finding retirement communities.

Save more. The retirement secret isn't where you invest, it's how much you save, says Kratz--not to mention how much you keep. The boomers, he says, are cashing in their 401(k)s as they move from job to job and "failing miserably in their investment strategies." Does anyone remember insured CDs? Their interest rate is meager, but they're always there. Kratz says his older, conservative clients who retire well put safety first--meaning plenty of money in the bank.

The most successful savers make their contributions automatic through payroll deductions or fixed amounts taken out of bank accounts each month. Even people living from paycheck to paycheck, who think they cannot possibly save, will find that they can, as long as they never see the money. Another strategy is to increase your 401(k) contributions by 2 percent every year. Save your raises, too, instead of putting them in your pocket. If you max out on retirement plans, start a Roth IRA.

To chart a specific savings and investment course, ask a financial planner to look at your income and budget, and run the numbers (but skip anyone who tries to sell you a financial product). Remember that you'll need to save extra for medical costs, as retiree health plans shrink and Medicare comes under pressure.

If you're in good health, figure on living to 90 or more--meaning that you'll want at least half your money in diversified stock-owning mutual funds (index funds, dividend funds), with the rest of your nest egg safely stowed in banks or short-term bonds. Forget about individual stocks. As you've learned, to your cost, even famous companies can blow up.

Planner Todd Black of Dogwood Capital Management in Cumming, Ga., says that if you start saving aggressively at 45, putting away 10 percent to 25 percent of your income, you could retire when you're 65 to 70--especially if a stay-at-home mom gets a paying job.

Work longer. If you stay on the job for just two extra years, you'll add to your retirement funds and reduce the number of years that you'll be living on your savings. "That's a swing of four years, and can make a huge difference in making a retirement strategy work," says planner Sherman Doll of Walnut Creek, Calif.

But working longer depends on your health. Almost all those NEWSWEEK spoke with said they'd probably work till they died, but that's a form of denial, too. Unless you literally keel over on the job, you'll have many years of old age and perhaps disability to fund.

Banish debt, especially credit- card debt. The percentage of seniors who pay only part of their bill each month hasn't changed much in the past 10 years, but among those who borrow, balances rose 89 percent--to $4,041--in 2001, according to "Retiring in the Red," a study by Demos, a group that studies economic security. Higher-income seniors aren't hurting; in fact, their debt burden has come down. The people with more debt, relative to their ability to pay, have lower incomes and less to spend. The number of people older than 65 who file for bankruptcy has tripled in the past 10 years.

Every person interviewed is counting on Social Security to help get them by. Federal Reserve chairman Alan Greenspan's recent call to cut benefits gave them the chills. For most people, savings and investments aren't the key to retirement security, says the AARP. Social Security benefits and traditional pensions together count for more than half the total wealth of 90 percent of the population. The percentage of retirees who rely principally on Social Security rose over the past decade and from 2002 to 2003. Imagine if they had private Social Security accounts and lost half?

Create a backup plan. Investors lost their socks in the market because they hadn't allowed for the risk that stocks might fall. In any financial arrangement you have to secure your base: insurance, savings and home equity first, and bonds as well as stocks.

Planners wouldn't be surprised to hear that many of the people NEWSWEEK interviewed had alternatives. One could sell her big house but doesn't want to. One can work longer to earn a larger pension. One owns some beachfront real estate that has tripled in value. One has a spouse who could get a job. No one will starve. The problem they're having is that they won't have the golden years that they imagined. "Happiness in retirement isn't linked to how much money you have," says Michelle O'Neill, a senior vice president at Harris Interactive, parent of the Harris poll. It all depends on what you planned for. If you downsize knowingly and on purpose, you'll be content. If not, you'll feel robbed. Adds Ramsay, "I have not seen a difference in happiness between clients who spend $50,000 per year and those that spend $150,000."

Finally, you're learning the little secret of retirement: you can live contentedly on less than you think. But not too much less. Otherwise, you might be bagging groceries at the minimum wage.