Late start retirement plan - 19 years to go

(Money magazine) -- I'm 46, self-employed and clueless about retirement. I can afford to put away $500 a month, but don't even know where to begin. I'd like to retire at 65, but wonder if that's even possible. Can you help? -- George, Alsip, Illinois

You're getting a late start here. Ideally, by the time you're in your mid-40s, you should already have savings equal to three to four times your annual income tucked away in retirement accounts, according to "Your Money Ratios" author Charles Farrell.

That figure assumes you'll want to retire at 65 on 70% to 80% of your pre-retirement income. It also assumes your savings will earn about four-and-a-half percentage points more than inflation each year, and that you'll continue to save 15% of income annually until age 65.

But let's just focus on what you need to do now. If you start saving now and stay diligent, you can improve your retirement prospects dramatically.

Many people in your position think picking the best investments is the key. Not so. Saving is much more crucial.

Get the ball rolling by putting that $500 a month you already know you can afford to save into an IRA account, which you can open at any mutual fund company or investment firm. Don't obsess about whether to go with a traditional IRA or a Roth IRA. If you prefer getting a tax deduction now, go with a traditional. If you'd rather forego the deduction today for the prospect of tax-free withdrawals in retirement, do the Roth. If you're unsure, do the traditional, as you can always convert to a Roth later.

Chances are you're eligible to contribute up to the maximum of $5,000 this year ($6,000 for people 50 and older), but you can check by clicking here.

To keep things simple, I suggest you invest your IRA stash in a target-date retirement fund. You just choose a fund with a date that corresponds to when you'd like to retire (2030 or 2035 in your case) and you get a ready-made portfolio that's appropriate for you now and becomes more conservative as you near retirement.

We highlight the target funds of Vanguard and T. Rowe Price on our MONEY 70 list of recommended funds, but both companies require a minimum initial investment of $1,000. You could open an IRA and invest in a target fund with Charles Schwab for as little as $100.

Once you've set up your IRA account and have savings flowing into it, you should start thinking about how you might improve on your planning for next year and beyond.

Your first priority: increase the amount you save. If you stick to $500 a month, you could accumulate a nest egg of roughly $225,000 after 20 years, assuming a 6% annual return.

That may sound like a lot of money -- and it is -- but it would likely generate sustainable inflation-adjusted retirement income of only $9,000 to $10,000 a year. You may be able to get by on that amount plus Social Security, but that's probably about all you'll be able to do -- get by.

To give yourself a shot at more comfortable standard of living and to provide a bigger cushion against unexpected expenses and the like, you'll want to do whatever it takes to save more, whether it's tricking yourself into a savings regimen or simply committing to increase the amount you put away by a pre-scheduled amount each year (say, going to $600 a month next year, $700 a month the year after, etc.).

To accommodate your extra savings, you'll also want to think about taking advantage of tax-advantaged savings vehicles designed for the self-employed and small business owners.

The two that are most likely to benefit you are the individual, or solo, 401(k) and the SEP-IRA. I won't get into the weeds about these accounts, except to say that they allow you to contribute as much as 25% of your self-employment earnings up to a maximum of $50,000 this year (plus an extra $5,000 in a solo 401(k) once you're 50 or older).

If you get to the point where you max out on tax-advantaged options and still have money to stash away, you can always move on to tax-efficient investments like ETFs, index funds and tax-managed funds in taxable accounts.

Finally, you'll want to monitor your progress periodically to see whether your goal of retiring at 65 is plausible given the amount of savings you're accumulating, or whether you'd be better off postponing your exit from the workforce a few years to have more retirement security. You can do that assessment by plugging information such as the amount you've saved, how much you're putting away each year and how much retirement income you'll need into a good online calculator every year or so.

Of course, you won't have any progress to monitor if you don't save. So open that IRA as soon as possible and start funding it with as much dough as you can. That is where you begin.