Saving enough for retirement

Question: I wanted to know if I'm on the right track for retirement and how do I stand if I want to retire early? I currently owe nothing but I do not have a home either. Between my wife and myself we have about $150K in Retirement accounts and about $150K in Investments and Savings. We are both 38 years old. So how do we stand if we want to retire at 55-60? By the way we do not live an extravagant lifestyle, both are active and healthy and love to travel. Ken, Santa Cruz, CA

Answer: One of the most haunting questions in finance and financial planning is, "What are the chances that you'll live out your days in comfort?"

Lee Eisenberg, author of The Number: A Completely Different Way to Think About the Rest of Your Life devoted a whole book on how that number--the uncertain sum of money we'll need to live well when we're old--is unknowable. (The book is an interesting meditation on retirement and retirement planning, by the way.)

Still, you can put yourself in a good financial position by following some basic savings strategies, taking a broad perspective on investment, and working longer. I know you say you want to retire at 55 to 60, but that is awfully young considering lengthening average life expectancy.

However, for many people working longer may mean saying goodbye to a full-time job and taking on a part-time job, contracting for several projects thoughout the year, and similar approaches.

Most importantly, by carefully thinking through "What really matters to me?" future retirees like you will devise sensible answers to the question "How much is enough?" At the moment, you're doing well by savings the way you are and going without debt.

There is no shortage of websites for running the numbers. All the major mutual fund companies offer retirement savings calculators. Bloomberg.com has a good collection of retirement calculators.

Of course, you can get a more realistic picture from sophisticated financial planning websites such as analyzenow.com and esplanner.com.

I like this quick gauge devised by Brett Hammond, chief investment strategist at TIAA-CREF. It's a rule of thumb based on an asset-salary ratio. "The big problem is that there is no magic number for the amount of money you need," Hammond told Amy Feldman of BusinessWeek for her story Sizing Up Your Nest Egg. "This is an attempt to address the needs of real people. If you tell me your assets, income, and age, I can tell if you're on track for retirement." You can read a far more detailed analysis behind the ratio in this paper by Hammond and David Richardson, a research fellow at the TIAA-CREF Institute.

Hammond figures that you'll need 70% of your pre-retirement income to maintain your standard of living in retirement. Corporate employees need to come up with 60% 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% of pre-retirement income once you stop working? Among the examples he gives, if your 35 and plan to retire at 65, you need 2.1 times your salary to be on track. By 45, you had better have 3.6 times, and so on. Check it out.

You seem to be in good shape. You have no debt and low expenses. You'll have to save more every year than someone who plans on retiring later. But run the numbers and see how you stand.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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