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Mapping a modest retirement

By Jennie L. Phipps ·
Wednesday, May 21, 2014
Posted: 7 am ET

© absolut/

If you're within 15 years of retirement, pull out your records and calculate what you can expect.

I've been helping a friend of mine figure out her retirement planning, and the result is good news.

A lot of the statistics that I read suggest that people, especially women, with ordinary incomes can look forward to a bleak retirement. But for my friend, a comfortable retirement is within reach.
If you're within 15 years of retirement, pull out your records and calculate what you can expect. The result may make you feel much more confident in your future. Or as my friend says, "All this info makes me feel much more relaxed."

My friend's experience

After a short-lived marriage, my 54-year-old friend spent the first few years of her life raising her children. During those years, she didn't work. When the children got to be old enough to be in school all day, she took a job at a nonprofit organization where she earned very modest wages. In the past few years, her income has gone up, but she still must manage her money carefully.

The nonprofit offers an old-fashioned defined benefit pension plan, but this year, her employer decided to freeze the pension. So the benefit won't rise between now and the time of my friend's retirement. Despite the freeze, she will qualify at full retirement, age 67, for a monthly pension of about $650. In addition, in place of the pension, the employer is offering a 403(b) plan to which it will contribute $2 for every $1 my friend contributes to the plan, up to 6 percent of her income -- a generous deal.

My friend asked me to review her situation. Here's some of the advice that I gave her that might be useful to others.

Keep working, Part 1. Working until at least full retirement age will increase my friend's Social Security benefit from $850 a month at 62 to $1,249 a month at 67. That's nearly $4,800 a year in today's dollars -- enough to make a difference, especially considering that Social Security is indexed for inflation. If she works until age 70, which is unlikely, she'll get $1,571 a month.

Keep working, Part 2. Social Security calculates benefits based on a worker's highest-earning 35 years of employment. If someone has worked fewer than 35 years, Social Security will average in zeros for those years. As anybody who has ever failed a test in school knows, a zero can have a terrible effect on an average. If my friend works until she reaches full retirement age, she will reach the 35-year mark and erase a couple of zeros and some low-earning years. That will increase her benefit -- not a lot, but every little bit helps.

Love that 403(b). In order to get her company's full match, my friend has to save 6 percent of her income. Neglecting to do that is the equivalent of saying, "No, thanks" to free money.

Beware the tax man. A retired individual whose "combined income" is between $25,000 and $34,000 may have to pay taxes on up to 50 percent of her Social Security benefit. If the income is $34,000 or more, she may have to pay taxes on up to 85 percent of her benefit. The "combined income" calculation is tricky: Add your adjusted gross income plus any nontaxable interest (such as earnings from municipal bonds) plus half of the Social Security benefit to see if it adds up to more than $25,000.

Stop worrying. My friend has lived on less than $35,000 a year for most of her life. Her pension and Social Security at 67 will amount to about $22,800 in today's dollars, and about $26,700 if she waits until age 70 to collect. The recommended percentage of replacement income in retirement is 80 percent of salary, or in my friend's case, $28,000.

My friend currently has no savings, but her children are grown and she doesn't spend much. If she can save 10 percent of her income, plus her employer's match and earn a modest 4.68 percent over the next 13 years, she can sock away $100,000 by age 67. After retirement she can spend 4 percent of her savings, plus Social Security and pension and be able to enjoy her life as well as she's ever done.

Wondering how you'll be able to retire? Read about these 6 last-minute retirement planning strategies.

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