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How much will you need? That's the $64,000 question-or is it the $500,000 question, or even the $1 million question? Those figures are often bandied about as the goal you should aim for in order to retire comfortably. Don't be intimidated-or worse, paralyzed. Everyone's retirement needs will be different, and there are many ways to cut down on your expenses, or to supplement your income from a variety of sources, to see you through. But instead of saving blindly, at some point it does help to take a realistic look at how much you'll need in retirement and where the money is going to come from. For starters, you can use a few rules of thumb: Figure that to maintain your standard of living in retirement, you'll need 70% to 80% of your pre-retirement income. For every $1,000 of monthly retirement income you want to generate from your own savings, you will need about $230,000 in assets, recommends the Schwab Center for Investment Research. For example, if you want $3,000 a month, or $36,000 a year, you would need a kitty of $690,000. That's a conservative estimate, assuming that you earn 5.2% on your investments and live off the earnings without eating into the principal. (Most likely you would not have to depend on your savings for your entire retirement income. You would also be entitled to social security payments and possibly pension benefits through your employer.) If you are in your 20s or 30s, try to save at least 5% of your income for retirement; women in their 40s should try to increase their savings to at least 10%. If you're meeting those savings goals, you're well on your way to meeting your retirement needs, says Christopher Hayes, executive director of the National Center for Women and Retirement Research.
CONSIDER THESE GOLDEN OPPORTUNITIES
For generations, financing retirement has been compared to a three-legged stool, the three legs being social security, employer pension plans, and private savings. But it has always been a wobbly stool, because those legs have never been even- especially for women. Social security has always been relatively more important for women than for men, especially before women entered the work force in significant numbers and acquired pension coverage of their own. But social security has always been the shortest leg of the stool, because it was intended to supplement, rather than replace, private savings. That helps explain why women over age 65 today have income equal to slightly more than half that of men, as discussed earlier.
Nowadays, both social security and traditional defined-benefit pension plans-in which retirees receive a fixed benefit from their employer, based on their income and years of service- are taking a back seat to defined-contribution retirement plans, such as IRAs and employer-sponsored 401(k)s, in which workers contribute to their own retirement kitties, perhaps with a company match.
While today's retirees are likely to rely on social security or employer-provided money as their most important source of income in retirement, current workers overwhelmingly expect personal savings to be their most important source of income when they retire in the future, according to the Retirement Confidence Survey. Yet 55% of those surveyed said that they are behind schedule in saving for retirement. At the same time, remember those workers who said they could save an extra $20 per week-or about $1,000 per year (highlighted earlier). Let's see what you could do with that:
- If you invest $1,000 a year starting at age 25 in a tax-deferred account, such as an IRA, earning 8% a year, you'd have over $280,000 at age 65.
- If you invest $1,000 a year starting at age 40 and earn 8% a year, you'd have $80,000 by age 65.
- If you invest $1,000 a year starting at age 50, you'd have over $30,000 at 65-not as much as the 25-year-old, but $30,000 is nothing to sneeze at, at any age.
Take full advantage of an IRA and you can get even more bang for your buck. The maximum annual contribution to an IRA is $4,000 (increasing to $5,000 in 2008). Annual contributions of $4,000 starting at age 40 would give you a nest egg of about $305,000 at age 65, again assuming an annual return of 8%.
If you're age 50 or over, the news is even better because of a "catch-up" provision in the tax law. Anyone who is 50 or older can kick in an extra $500 above the $4,000 maximum (in 2006 that catch-up amount rises to $1,000). Sock away $4,500 a year starting at age 50, and in 15 years at 8% you'd have a nifty $125,000-not bad for a late bloomer. In addition to IRAs, contribution maximums also increase for 401(k), 403(b), and other tax-deferred retirement plans, and there are catch-up provisions for those as well.
So don't be discouraged. Whatever your stage in life and no matter how much you have-or have not-saved until now, you have lots of incentives to start planning for a comfortable- and independent-retirement.
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