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Judging how well you're doing with retirement savings

Question: I am very lost and uncertain of our financial road to retirement. Our company doesn't offer defined payment retirement; it is all up to individual and 401(k). The company does match 3 percent. I am married and we have been working for 14 years now and have combined liquid assets (401(k), outside investment account, savings) of about $400,000, plus home equity of $100,000 on a good day. What shape are we in on our road to retirement? Thanks much. Martin, Chicago, IL

Answer: Ed Koch, the irrepressible three-term mayor of New York City, used to ask everyone he met, "How'm I doing?" His signature greeting usually got a big smile. Yet "How'm I doing?" when it comes to retirement is one of the more haunting questions in personal finance. Problem is, the amount of money you'll really need in your elder years is truly unknowable. There is simply too much uncertainty and too many imponderables.

That said, most people will be in a good financial position entering the retirement years if they've saved and built up equity over time (and, I would add, plan on working well into the traditional retirement years). Even more important, by thinking through "What really matters to me?" future retirees can come up with sensible answers to the question "How much is enough?"

Your question includes only a few pertinent financial details, but my reaction is that you're doing well. You're on track.

There is no shortage of websites for running the numbers. For example, all the major mutual fund companies offer retirement savings calculators. For a quick gauge, I like the one devised by Brett Hammond, formerly chief investment strategist at TIAA-CREF. It's a rule of thumb based on an asset-salary ratio. He figures you'll need 70 percent of your pre-retirement income to maintain your standard of living in retirement. Corporate employees need to come up with 60 percent of their pre-retirement income during their post-working years from their 401(k) plans. (Social Security fills in the remainder of the gap.)

How will you know if your nest egg will cover 60 percent of pre-retirement income once you stop working? If you're 35 and plan to retire at 65, you need 2.1 times your salary to be on track. By 45, you should have 3.6 times. At 55, the multiple rises to 5.4 times. And by the time you retire, you'll want it to be 7.7 times. Read in more detail here.

You can get a far more realistic and useful picture from a financial planning website, especially with Analyzenow.com and Esplanner.com. I highly recommend both. You could also set up a session with a fee-only certified financial planner for a consultation. You don't necessarily need or want an ongoing relationship. But the expertise of a planner can be valuable at major transition points, such as retirement planning. 

One last thought. I'm a fan of syndicated columnist Mark Miller's The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living. Check it out.

About the author

Chris Farrell is the economics editor of Marketplace Money.
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