How far along are you on road to retirement?

December 31, 2006|By Janet Kidd Stewart | Janet Kidd Stewart,chicago Tribune

It's almost 2007. Where are you on the road to retirement?

Retirees today start with five to six times their average annual income, according to Mauricio Soto, a senior associate at the Center for Retirement Research at Boston College.

"Most people today are fine, but Social Security replacement rates are going down, and people are retiring earlier," he said. As that happens, and with pensions and retiree health care disappearing, five times income isn't going to be enough, he said. "I'd say you're looking at needing between seven and 10 times income."

Some investment firms and financial planners say you'll need even more. A couple earning $100,000 just before retirement would actually need $1.25 million in investments just to safely withdraw half their pre-retirement income, or $50,000, annually in retirement, according to a growing number of advisers who recommend withdrawing 4 percent of a portfolio in the first year, then adjusting for inflation thereafter.

So where are you on this journey? Grade yourself on the following measures to see if you're well on your way or stuck at the starting gate:

How much should I have saved by now?

This is a figure that's notoriously hard to pull out of financial advisers who don't want to appear preachy to clients - or scare them away.

Christine Fahlund, senior financial planner with T. Rowe Price, wants to see workers accumulate 100 percent of their annual income by the time retirement is 30 years away. When retirement is 20 years away, the worker should have two times income, and when retirement is a decade away, six times income.

Those goals are generally achievable if you've been socking away 15 percent of income steadily since you were in your 20s or 30s, Fahlund said. If you started late, you need to save a higher percentage of your paycheck.

T. Rowe Price offers these savings benchmarks to help understand where savers stand today:

Give yourself an A if you're at retirement and have 11 times income in your savings account; it will replace 52 percent of your current salary in retirement (Social Security and any employer pensions would be on top of that). Give yourself a B if you've got 10 times final pay, which will replace 47 percent of income. Anything less and you're probably looking at a different lifestyle in retirement.

If retirement is 10 years out, give yourself an A if you've got six times salary, which will mean you're on track to replace 47 percent of final pay; B if you have five times (41 percent); C for three times (28 percent); D for one times (15 percent) and F for anything less, which will only get you 8 percent of current salary if you're saving 15 percent of income every year from now until retirement.

If retirement is 20 years away and you've only got a multiple of one times salary, you'll need to start saving 25 percent of income every year until retirement to replace 43 percent of your current income, according to T. Rowe Price.

How retirement-friendly is my career?

Give yourself an A if you have a pension, a 401(k) savings plan and your company pays medical benefits for retirees. Most people need to factor in job stability and benefits as a measure of retirement security.

"A lot of people in their 40s are still switching jobs frequently," said Jim McCarthy, head of retirement and equity solutions for the Global Wealth Management Group at Morgan Stanley. This is the time to figure out whether your employer offers retiree benefits, and how many years of service are required to tap them, before jumping ship again, he said.

How closely do I monitor my nest egg?

Give yourself an A if you maintain a perfectly balanced portfolio, keep trading and advice fees low and stay current on tax trends. Give an F if you were put into your company's 401(k) plan automatically and couldn't explain what you're invested in to save your soul.

Most people are somewhere in between, so make it a goal for 2007 to examine fees and tax strategies.

Just one example: Do you pay a separate fee, called a wrap fee, on your retirement accounts? If so, McCarthy said, you can ask for them to be billed separately so you can pay those costs with current income and let your retirement money grow.

Even better, think about what you're getting for that fee and see if a lower-cost option would be right for you.

Have a retirement question? Write via mail to Your Money, Chicago Tribune, Room 400, 435 N. Michigan Ave., Chicago, Ill. 60611. If your letter is selected, we might include you and your question in a future column.

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