1 plans for 2 in retirement

Personal Finance

Your Money

May 01, 2007|By Eileen Ambrose | Eileen Ambrose,Sun Columnist

You've heard of two living as cheaply as one, but can two retire as cheaply as one?

Jim is a document manager in Baltimore and his wife stays at home with their two children. He's 41, his salary is in the high five figures and he has nearly $150,000 in his 401(k).

"Am I on track?" he asks in an e-mail. "Do I need to have double since my wife is a stay-at-home mom?"

Jim's off to a good start, but without knowing other details, such as when he plans to retire and the couple's expected lifestyle in retirement, it's difficult to give a firm answer.

Nevertheless, Rockville financial planner Robert B. Friedland crunched some numbers for Jim based on the few details available.

Friedland assumed that Jim would retire at 66, his normal retirement age under Social Security. Friedland figured Jim would need to save about 10 percent of pay each year - including any employer 401(k) match - if he and his wife want a lifestyle in retirement that's commensurate with a $50,000 income today.

If the couple want a lifestyle more in line with $90,000, they will need to save about 20 percent of Jim's income until he's 66, Friedland says.

So, can two retire as cheaply as one? No. But on the other hand, it's not twice as expensive, either.

Planners say that saving twice as much, as Jim suggested, is a worthy goal. And it will be easier to do so in a year or two when his wife returns to the labor force.

"It never hurts to have more savings," says Mari Adam, a financial planner in Boca Raton, Fla. "Probably one 401(k) would not be enough."

Friedland suggests that Jim max out his contributions to his 401(k). With any extra dollars, Jim should open Roth IRA accounts for himself and his wife. With a Roth, money goes in after you've paid taxes on it, but withdrawals are tax free in retirement. The couple's income would qualify them to each contribute up to $4,000 a year.

If this is too much of a stretch, Jim should contribute enough to his employer's plan to get the match and then open a Roth IRA for his wife, Adam says.

Adam likes the IRA for Jim's wife for other reasons than tax benefits. Retirement assets, no matter whose name is on the account, belong to both spouses.

Still, there's a psychological benefit for stay-at home spouses to have money in their own name and feel part of the effort to save for retirement, Adam says. It also will make the stay-at-home spouse more engaged with investment decisions, she says.

Jim should be congratulated for asking for a checkup, Friedland says.

"Far too many people wait until they are within five years of leaving the labor force to ask this question about retirement," he says.

For others concerned about where they stand on retirement savings, Friedland suggests the Ballpark Estimate, an online calculator at www.choosetosave.org.

Adam recommends checking out the "National Savings Rate Guidelines for Individuals" study recently published by the Journal of Financial Planning at www.fpanet.org/journal.

Researchers looked at what percentage of income workers must set aside for retirement based on their age and current savings. The goal is to replace 80 percent of a worker's gross income, minus any money now being saved for retirement.

The study concludes that workers must start saving for retirement no later than age 35 if they don't want to experience a big drop in their lifestyle trying to catch up.

Questions? Comments? Write personal.finance@baltsun.com.

MORE AMBROSE Find Eileen Ambrose's column archive at baltimoresun.com/ambrose

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