July 19, 1999|By Jane Bryant Quinn | Jane Bryant Quinn,Washington Post Writers Group

A READER in San Diego writes that he plans to retire young. He wants to know how much he'd have to invest each year, to have $1 million by age 52?

That sounds like a simple question, easily solved with a retirement calculator. Enter your age (click, he's 36). Enter your current savings (click, he has $30,000). Enter an investment return (click, he expects 8 percent). Click, click and the answer will come forth.

I have bad news -- for the San Diego reader and everyone else who uses this approach. And I'm speaking not only to people who use calculators they find on the Web. Please listen up if a broker or planner used a retirement calculator to help you develop a savings goal.

The answer the calculators gives you is always wrong.

Duh, you say. Everyone knows the answer is only an estimate. Still, you expect the estimate to be reasonably close.

That's what's wrong. You might miss your goal by a mile, even if you save exactly what the planner or calculator says.

Here's why:

Retirement planners cannot guess what the stock and bond markets will do each year. Instead, they use a reasonable average, based on historical returns.

If you decide on 8 percent, you'll project an average gain of 8 percent a year.

Stocks won't gain exactly 8 percent each year. But you assume that, after 15 or 20 years, your nest egg will be pretty close to average.

Unfortunately, that's not so. There's no particular reason for you to achieve an average return. When you're making regular investments, the size of your future nest egg depends not on average returns, but on the share price of your mutual fund or other investments, every time you buy.

As a simple example, take three savers who each have $30,000 in mutual funds. They each aim for $54,000 after three years, and all enjoy an average annual return of 8 percent.

But they invest at different times, so for each of them, the market achieves 8 percent in a different way. Here's what that means to the amount they have to invest:

For Saver One: The market rises exactly 8 percent each year. She'll get $54,000 by investing $5,000 annually.

For Saver Two: The market falls 6 percent in the first year, then rises 10 percent in the second year and 20 percent in the third year. He'll build a $54,000 nest egg by investing just $4,772 annually.

For Saver Three: Her market reverses the returns enjoyed by Saver Two. She gets 20 percent the first year and 10 percent the second year, then suffers a 6 percent loss in year three. To get $54,000, she'll have to invest $5,649 annually. That's 18 percent more than Saver Two.

When you think of the possible variations in stock prices, you can see that there are literally millions of answers to the question, "How much should I invest" to reach a specific goal?

A better question is, "How sure do I want to be that I can reach my retirement goal, and how large an investment will that take?"

To answer that question for the reader in San Diego, I turned to Financial Engines of Palo Alto, Calif., creator of the best Web retirement planner I know (it's new and free; check it out at www.financialengines.com).

Senior researcher Sylvia Kwan took a 36-year-old with $30,000 who wants to retire with $1 million in 16 years. She assumed that his money went into a mutual fund that tracked the Standard & Poor's 500 stock index.

Here's her conclusion:

For a 50-50 chance of winding up with $1 million, San Diego should invest $23,500 a year. For a 75 percent chance of reaching the goal, invest $33,000. To be almost certain of having $1 million, invest $54,000 a year.

This assumes no inflation. To have $1 million after inflation, save about 50 percent more.

Why have I bothered you with this? To show you that there isn't a single magic number that tells you how much you ought to save. There are many numbers, depending on how sure you want to be.

Most of us don't have Kwan on call, so the best we can do is invest as much as we possibly can, check our progress as we go along, then adapt our retirement standard of living to whatever we've got.