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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STEP 3 | How big a nest egg do you need? The difference between these sources of income and your projected retirement-income needs is how much you will have to make up with personal savings. Table 2 shows how much you need to produce $1,000 of monthly income over various periods assuming different investment returns. How long is your retirement going to last? That depends, of course, on when you start and how long you live. For the purposes of this calculation, figure you'll live to age 90 and pick the number from table 2 that comes closest to the number of years your money will have to last. For example, if you expect to earn an 8% annual return in retirement (reflecting a more conservative investment strategy than during your accumulation years) and you want your nest egg to last 35 years, the point where 8% and 35 years intersects is $141,700. That amount goes on line O. If the monthly income you need from your nest egg is $8,000, multiply $141,700 by 8. The result, $1,133,600, is your preliminary nest-egg goal.

Table 2 Nest eggs for $1,000 a month

                ANNUALS RATES OF RETURN
YEARS IN
RETIREMENT      8%        10%        12%

25           $130,400   $111,000   $95,900
30            137,200    114,900    98,200
35            141,700    117,300    99,500
40            144,800    118,700   100,100

Inflation can have a devastating impact on the purchasing power of your retirement income. Because you're planning for a retirement that will last longer than two decades, use line Q to multiply your preliminary goal by 1.4 to build in inflation protection.

STEP 4 | How much have you already accumulated? Don't panic. You may have more than you think. Add up everything in your and your spouse's 401(k)s, traditional IRAs, Keoghs and other tax-favored retirement accounts, as well as money you've earmarked for retirement in taxable accounts. Plug the total into line S.

Now adjust that figure for expected growth between now and your retirement by using a growth factor from table 1. If you have $100,000 now, plan to retire in 20 years and expect your investment to return 10% a year until you retire, multiply $100,000 by 6.73, the point where 20 years and 10% intersect. That $673,000 is the projected future value of your current savings (line U).

STEP 5 | How much will you draw from home equity? Your home can be a major source of income in retirement. If you sell it and buy or rent something less expensive, the leftover amount becomes part of your nest egg. Because the first $250,000 of profit from the sale of a home is tax-free--$500,000 if you file a joint return--it's unlikely that taxes will cut into your profit. For a quick-and-dirty estimate of what your home could contribute to your early retirement, take today's value and multiply it by a growth factor from table 1, assuming 3% growth and the number of years you have until retirement. Subtract any outstanding mortgage you will have at that time and the down payment you will need for a new home, and enter that amount on line Z.