|You need a wad of money to retire
Estimate how much you will get from other sources
of income during retirement. How much will Social Security ostensibly
pay you each month? What about a regular pension -- you got one
of those? Lucky you! Ask your company-benefits expert to estimate
the monthly payout for you at your expected retirement date. Then
subtract these amounts from your monthly income needs to determine
the shortfall. That's the amount that you'll need to come up with
from your 401(k), IRA and personal savings plans.
For instance, let's say you need $4,000 per month
for food, utilities, insurance, taxes, medical bills, golf outings,
facial peels, etc. Imagine that your Social Security and pension
checks cover half that amount. You'll need a wad of cash to pay
the $2,000 difference during your retirement of 20 or 30 years,
depending on how long you stick around. How big a wad will you need?
Below is a chart
that will help you determine
what you'll need at the time
you retire. It's not a perfect
chart. But it provides a target
to aim for so you can sustain
yourself for the duration. For
instance, using the above example,
if you need to supplement your
expected Social Security and
pension payments with an additional
$2,000 a month and you expect
to live 20 years, you'll need
|The pot of gold you need for retirement
The above sums assume
your portfolio will earn
a 6 percent annualized
return during the course
of your retirement and
endure 2 percent annual
inflation erosion. At
the end of the 20- or
30-year period, your account
will be depleted. If you
want to leave money to
progeny, you need an even
bigger wad of money.
Do these numbers look formidable? Reaching a retirement savings goal depends in large part on how early you start, how much you stash away each month, your risk tolerance, how your assets are allocated, your investment returns, how much you have saved so far and how much time you've got left in the work force. To get an idea of how much you can save with the time you have left, check out Bankrate's 401(k) calculator.
It's not a perfect world
Naturally, the amounts in the chart above give you a ballpark idea
of your needs, but they're not perfect estimates for many reasons.
For one thing, there's a host of unforeseen expenses that you might
run up against, such as -- egads -- nursing home costs. And don't
forget the ridiculously high and rapidly accelerating cost of health
Also, those numbers are good only if your retirement is imminent. If it's down the road 10 or 20 years, you'll need a higher monthly income because inflation will have eroded the value of a dollar considerably.
Another big problem: The market does not provide steady
returns year after year. It's all over the place. If you suffer
significant losses just before you retire, you might have to hang
in and work longer so you can throw more money in your 401(k). I
bet that happened to many folks who were too heavily invested in
tech stocks in early 2000, thinking they were set for life. What
a stomach-wrenching, free-fall ride they endured in ensuing months!
To account for these wide market swings, you might
want to use a calculator with a Monte Carlo simulation technique.
That's a great name for it because, let's face it, the market's
a big gamble on a year-to-year basis. Investment firm T. Rowe Price
offers such a calculator
on its site. As its tutorial explains, the calculator takes into
account the effects of 500 different market scenarios on your account
balance over the projected retirement period. If you choose a simulation
success rate of 90 percent, that means that out of 500 possible
economic outcomes, you'll succeed 450 times. That means chances
are good that you'll have at least a buck in your account when you
heave your last sigh.
But in the meantime, while you're in the wealth-accumulation
stage, try not to get scared out of the market when it does go awry.
Just keep your portfolio well diversified, throw more money in and
keep your faith.
Longtime financial journalist Barbara Mlotek Whelehan
earned a certificate of specialization in financial planning. If
you have a comment or suggestion about this column, write to Boomer
Updated: April 10, 2007