Calculating how much you need for retirement
07/30/2010 0 comments
It's a shocking statistic: About 47 percent of early baby boomers and 44.5 percent of Generation Xers — age 36 to 45 — are on course to run short of money for basic living expenses like food and electricity in retirement, according to the Employee Benefit Research Institute.
Will you be among them? Taking a glimpse into your future now will help you make sure you don't end up wondering how to pay the cable bill in your 70s.
Saving all along? If you started putting about 10 percent of your annual salary into a 401(k) or IRA in your 20s, and keep doing it until you retire, you will probably be fine. If you haven't started, start now.
What's the impact? If you are 25 and earning $30,000 now, you will invest about $40 a week in your 401(k) this year, and if your investments behave the way history suggests, you wind up with about $1.2 million when you retire. Of that, about $370,000 will be from the free matching money your employer dropped into your 401(k) — a pretty good deal. For this calculation, I assumed you would invest in a mutual fund with your retirement date of 2055 in its name, that your salary goes up 2 percent a year and that you earn an average of 7 percent a year in the mutual fund. To experiment with your pay and savings try: 401k.fidelity.com/public/content/401k/Tools/ContributionCalc
It's important to note that 7% annual rate of return is not easy to achieve. In a prior article we demonstrated that without at least five asset classes, it's unlikely to achieve this goal without an advanced strategy -- so check your plan returns -- you can request a free return calcuation from MyPlanIQ to tell you what your plan can achieve.
Financial planners generally tell people they will probably feel comfortable in retirement if they have enough savings to replace 70 to 80 percent of their last pre-retirement salary. That's because they will no longer have expenses like commuting to work or saving new money for retirement. Yet, a person who has expensive hobbies, wants to travel or take on an expensive mortgage, could find 80 percent too limiting.
Tags: Retirement, 401K
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