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Putting A Price Tag On Your Dream - ROUGH - financing an early retirement - Statistical Data Included

Kiplinger's Personal Finance Magazine, March, 2001 by Mary Beth Franklin

COVER | Before you even start, you know the drill: SAVE EARLY AND OFTEN.

HOW MUCH money is enough to finance an early retirement? We're not going to kid you: There is no simple answer, and frankly, the further away you are from retirement, the more ridiculous it is to try to pinpoint the exact size of the nest egg you'll need. Worksheets like this one (including ones that are far more complicated) aim to show you not only how much you need to amass but also how much you should start saving each month--right now!--to reach that goal.

One problem will leap out at you when you get to the bottom line. Let's say our worksheet delivers the devastating news that you need to be saving $1,000 a month if you hope to retire at 60. If you're 35, have a big mortgage and are facing the prospect of sending three kids to college in the next decade, that may seem ludicrously high. But 25 years from now--when college bills are behind you, the house is paid for, your salary has soared, and the value of the dollar has been cut in half by inflation--$1,000 might seem more like pocket change. Clearly, your ability to save for retirement will change over the years.

Shooting for early retirement throws more flies in the ointment. You can't touch your 401(k) without penalty until age 55, traditional IRAs are similarly off limits until age 59 1/2, and you can't get social security until you're at least 62. Yet, when those sources become available to you, they are sure to be major sources of your retirement livelihood. Since we're shooting for a rough estimate of your needs, this worksheet ignores the fact that your income will come from different sources at different times. Clearly, the closer you get to the time you want to retire, the more you need a more precise look at how much money you'll need, exactly where it will come from and how much you can safely withdraw each year without running out of money. That's when you need to see an experienced financial planner or sign up for a retirement-planning program such as the one offered by T. Rowe Price (see "Exit Strategies," on page 38).

With all these disclaimers, why fill out the worksheet at all? To get a quick look at your retirement needs and, just as important, to see what resources you'll have to meet them. To avoid doing the math yourself, visit our Web site (www.kiplinger.com) for an interactive version of the worksheet. And for a more detailed calculator, visit the 401(k) Advisor site discussed in the story on page 42.

Here's how to complete the early-out worksheet:

STEP 1 | HOW much Income will you need in retirement? Start with your current income (and your spouse's if you're married), and choose a growth factor from Table 1. For example, assume inflation will average about 3% a year between now and the time you retire, and that your salaries will keep up. If you stick with 3% and expect to retire in 20 years, find the point on the chart where the two intersect: 1.81. Enter this number on line B and multiply to find your preretirement income.

Table 1 money-Growth and inflation factors

                         ANNUAL GROWTH RATE
YEARS TO
RETIREMENT    3%     4%     6%     8%     10%     12%

 5           1.16   1.22   1.34   1.47    1.61    1.76
10           1.34   1.48   1.79   2.16    2.59    3.11
15           1.56   1.8    2.4    3.17    4.18    5.47
20           1.81   2.19   3.21   4.66    6.73    9.65
25           2.09   2.67   4.29   6.85   10.83   17.00

A common rule of thumb suggests that you'll need 80% of that amount to maintain your lifestyle in retirement. That could be right on or wildly off target and, as you get closer to retiring, you'll need to make a detailed budget to estimate your true needs. But for now, 80% is probably as good an estimate as any.

STEP 2 | HOW much will you (jet from social security and pensions? All workers age 25 and older should automatically receive a benefits estimate from social security each year, or you can visit www.ssa.gov or call 800-772-1213 to request one. If your personal statement isn't handy, you can use an estimate based on these examples: If you're 40 and earning $80,400 or more (the maximum earnings subject to the social security tax in 2001), you might expect a monthly retirement benefit of $1,887 (in current dollars) at your full retirement age of 67, or a reduced early-retirement benefit of $1,311 if you retire at 62. A 40-year-old earning $50,000 a year could expect a monthly social security benefit of $1,514 at 67, or $1,055 at 62.

If you are eligible for a traditional pension, ask someone in your company's benefits office to give you an estimate of your monthly benefits check in today's dollars, assuming you stay at the same job until you retire. Add your social security and pension benefit together and adjust the total assuming the amount will keep up with inflation between now and the time you retire. (Use a growth factor based on 3% to be conservative. If raises push your pension benefit ahead at a faster pace, all the better.) Write the total adjusted figure on line J.

Financial Services Industry

Putting A Price Tag On Your Dream - ROUGH - financing an early retirement - Statistical Data Included

Kiplinger's Personal Finance Magazine, March, 2001 by Mary Beth Franklin

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