How much do you need to retire?
— reported by MSN Money
Buck up, America. You may be better prepared than you think. Saving 15% is a very good start.
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This modern model rests on a solid foundation. Nearly 80% of employees participate in their work-based retirement plans; 401(k) plans alone have more than 42 million active members. All told, more than $13 trillion has been stashed in a variety of public and private retirement plans, more than double the amount invested 10 years ago (and despite a brutal bear market).
That’s the big picture. How much will you personally need in order to finance your life in retirement? Depending on your age and economic circumstances, your “number” could be 15% — the percentage of earnings young workers should be socking away. Or 80% — the amount of pre-retirement income you should aim to replace when you leave your job. Or $1 million (or more) — the size of the nest egg needed to generate that much income.
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Young workers don’t need to get hung up on a specific target for their retirement nest egg. Save as much as you can as early as you can and you’ll be off to a great start. Although there is no hard-and-fast rule, Christine Fahlund, senior financial planner with T. Rowe Price, recommends that young workers try to save 15% of their gross salary (including employer matching contributions) in order to replace 50% or more of their salary in retirement (the later you start, the more you’ll need to save).
Most retirees will also receive Social Security benefits that could replace another 20% or 30% of pre-retirement income. For the average wage earner — with an income of $37,000 in 2005 — Social Security replaces about 42% of pre-retirement income; the figure is less for those with higher earnings. That would boost total income close to the 75% to 85% range of pre-retirement earnings generally recommended.
Don’t see how you could possibly save 15% of your income? It doesn’t all have to come out of your pocket, so it isn’t as painful as you might think. Let’s say you are single and earn $50,000 a year. Let’s also say you contribute to a 401(k) plan, and the company matches your contribution 50 cents on the dollar up to 6% of your salary — the most common matching formula. You’d need to contribute $3,000 to your 401(k), or $250 per month, to get the largest possible matching amount, $1,500.
But 401(k) contributions are made in pretax dollars. So in the 25% federal tax bracket, saving $250 a month would reduce your take-home pay by just $187.50, or $2,250 per year. With your employer deducting the money off the top of your salary, you wouldn’t miss the cash. And taking that single step would get you more than halfway to your annual savings goal.
To close the gap, you could contribute an additional $3,000 to a Roth IRA. In retirement, you’d have to pay tax on funds withdrawn from your 401(k), but withdrawals from your Roth would be tax-free. In 2006, you can contribute up to $4,000 of earnings to a Roth, plus an additional $1,000 in catch-up contributions if you’re 50 or older. To qualify for a Roth, your income can’t exceed $110,000 if you’re single or $160,000 if you’re filing a joint return.
In the end, adding 15% of your $50,000 earnings, or $7,500, to your retirement kitty would cost you only $5,250 out of pocket.
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Delaying retirement for a few years can boost your Social Security benefits and reduce the amount you need to save to create sufficient retirement income for life. Consider how a married couple in their early 60s earning $77,000 per year — roughly the median pretax income of married households ages 55 to 64 in 2002 — can cut their savings needs by 40% if they delay taking retirement for four years, until age 66.
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