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Recipe for retirement savings

By Jennie L. Phipps ·
Sunday, November 14, 2010
Posted: 10 am ET

If you need a little retirement planning inspiration, here's some good news from Fidelity Investments, the nation's largest provider of 401(k)s. Fidelity says that among its 11 million retirement plan participants, for people 55 years and older who contributed steadily to their retirement accounts for the last 10 years, the average balance went from $96,000 to $211,300.

If they saved 8 percent or more of their paychecks, their savings rose 130 percent from an average balance 10 years ago of $125,600 to today's average of $291,700.

"The past decade was certainly not a lost decade for participants who remained committed to saving even through all of the market's ups and downs," said James MacDonald, president of workplace investing at Fidelity Investments. "A disciplined, systematic savings approach in a diversified portfolio has been the key to building a sizable nest egg for many pre-retirees during one of the most volatile decades in history."

To put this in perspective, I plugged these numbers into the 401(k) savings calculator. I assumed this worker made $50,000 a year and contributed 10 percent of his salary to his retirement account, and his employer matched his savings at 50 cents per $1 contribution up to 6 percent of pay. This is the most common contribution level, according to the Profit Sharing/401(k) Council of America, a trade group.

I didn't give him a raise for 10 years. In this economy, he may have not received one.

Taxes on the income he saves is deferred. If this worker is in the 15 percent tax bracket, his contribution saves him $975 annually in taxes, reducing the pain of saving that much.

For this worker's savings to reach $291,700, he had to average a little less than a 6 percent return annually on his investments. He would have had to have a few really good years because there were undoubtedly years over the last 10 where he didn't make that much.

If he retires at 66 and continues to invest the $291,700, but withdraws the recommended 4 percent annually,  he'll have at least $11,668 in income along with his Social Security. This would mean he has an estimated $17,472 per year, according to Social Security's simplest calculator. This would begin in 2016, when our worker is of full retirement age at 66.

After adding the two together, this gives him $29,140 a year to live on. Not a princely sum, but he'll pay no income taxes. If he takes the $291,700 and buys an immediate annuity for himself alone, he'll make $1,804 a month or $21,648 a year, according to This would raise his annual income to $39,120 -- enough income that he can afford to keep beer in the fridge.

If he has a wife who is also 66 and who wasn't employed outside the home very long, she'll qualify for half his Social Security, or an additional $728 per month -- $8,736 annually. This would raise the family income to $47,856 -- or about what they have been living on all along.

All in all, this is good news and a good reason to keep plugging money into a retirement savings account -- even those years when it hurts.

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