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How to tell if you're on track

At age 65, Marty has amassed $453,133, about $16,000 more than Cindy's nest egg of $437,320. But remember, Marty contributed $120,000 of his hard-earned money to reach this sum; Cindy's outlay was only $30,000.

OK, the above illustration of Cindy and Marty's savings is simplistic. Most people will save a percentage of their income each month rather than a lump sum once a year, plus it doesn't take inflation into account. But this calculation serves to show the magic of compounding when it has an extra 10 years to work for you.

Note, though, that if Cindy were truly savvy, she would continue to save for retirement throughout her life, since women face more retirement challenges than men. In fact, a recent study by Hewitt Associates found that, on average, women should save 2 percent more of their annual pay than men to have the same standard of living in retirement. This helps to offset their lower earnings and longer lifespans.

 How much do you need to save?
Let's say you've been saving for retirement and you're in the middle of your earning years. How are you doing? It's hard to know offhand. You might want to enlist the services of a fee-based financial planner.

But if you want to get a quick idea, read on. A study that appeared last year in the Journal of Financial Planning provides a way to determine if you're on track or if you need to step up your savings.

The study's authors assume that you will need to replace 80 percent of your pre-retirement income, defined as gross salary minus the amount you've been saving for retirement. The reasoning: You won't be saving for retirement once you're retired. The authors also assume that pre-retirement earnings and post-retirement cash flow needs to grow in line with inflation at 2.5 percent annually, and that upon retirement, you will use the money to purchase inflation-indexed annuities that guarantee income for life.

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Check out the table on the next page to find out what your current savings rate should be. For example, let's say you're 40 years old and you earn $60,000 a year. If you have not saved anything up to this point, your savings rate should begin immediately at 17.6 percent.

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