Q: Would you please write about empty nesters who put their retirement in jeopardy by buying more expensive homes, boats, vacation homes, etc.? Many people (including my husband) have a golden opportunity to catch up with their retirement savings when the kids are grown, college is paid for and their income is at its peak, but they want to spend the extra money instead of using this time as an opportunity to get ahead.

A: Our 50s are the "make or break" decade for most Americans. It's when reality can make a mess of your life, big time, or you can choose to make the mess all by yourself.

We are encouraged to save by our employers and a mind-numbing volume of advertisements from the financial-services industry. In spite of that, few people in their 20s save. Ditto their 30s. Those are the years of acquisition — or paying off student loans.

Most people start to save in their 40s and, if they are smart, really get into it in their 50s. While that may seem too late to make a major change, it's a good time to work on making the transition from working to retirement smooth.

Basically, we all face a choice when the last tuition bill is paid. We can increase our standard of living (buy that boat, take that cruise). That can make it inevitable we'll be living in reduced circumstances later.

Or we can save enough to smooth our transition from working to retirement.

Here's how it works. The most common measure of retirement security is called the "income-replacement rate" — the percentage of your final working income that is needed to have the same standard of living in retirement — after adjustment for work expenses, tax changes, etc. That figure runs from 70 to 85 percent.

A single-earner couple with a working income of $70,000, for instance, needs a retirement income of $56,000. That's a replacement rate of 80 percent. About half of that amount will come from Social Security. The remainder must come from savings.

But if you save 20 percent of your income rather than spend it, you'll do two things: Increase your savings and reduce the income you need to replace from 80 to 60 percent because you won't be saving when you are retired.

Q: Why are dividends and capital gains taxed at 15 percent, or less, while earned income is taxed at higher rates?

A: The conventional economic argument is that taxing dividends is double taxation because the corporation has already paid taxes on the dividend income it distributes.

The same double taxation is why some corporations have reorganized into partnerships so all income can be passed through to investors — they avoid the corporate tax.

The conventional argument about capital-gains taxation is more complicated. While short-term investment gains are taxed at ordinary income rates, long-term capital gains can be illusory.

Suppose, for instance, you made an investment that rose in value by 3 percent a year. At the end of 24 years it would have doubled in nominal value — but the purchasing power of the sale proceeds would be exactly equal to the purchasing power of the original investment. To tax that gain would amount to a tax on the asset itself. That would discourage saving and investment.

While people who don't save and invest are unlikely to be sympathetic, this would be shortsighted — the greater the taxes on saving and investment, the higher the return investors will demand. Ultimately, that would mean higher interest rates for borrowers.

There is also a more pragmatic reason to keep taxes on capital low — maximizing government tax revenues. People with large amounts of money have more choices about when, and how, to realize their income than most people.

If the taxes on capital gains and dividends are high, the rich will avoid realizing income. They will pay less in taxes. If the taxes on capital gains and dividends are low, they will choose to realize income and pay more in taxes.

Questions about personal finance and investments may be sent to Scott Burns at The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; by fax at 214-977-8776; or by e-mail at scott@scottburns.com. Questions of general interest will be answered in future columns.