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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.

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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 $333,392.

The pot of gold you need for retirement
Monthly income
Wad of money needed
for 20 years
Wad of money needed
for 30 years
$1,000 $166,696 $212,150
$2,000 $333,392 $424,300
$3,000 $500,087 $636,450
$4,000 $666,783 $848,601
$5,000 $833,479 $1,060,751
$6,000 $1,000,175 $1,272,901
$7,000 $1,166,871 $1,485,051
$8,000 $1,333,567 $1,697,201
$9,000 $1,500,262 $1,909,351
$10,000 $1,666,958 $2,121,501

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 care.

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 Bucks.

-- Updated: April 10, 2007
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