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Making early retirement happen
A 33-year-old reader wants to know if he can count on an early retirement. The Expert has some tips for him.
By Walter Updegrave, MONEY Magazine senior editor

NEW YORK (CNNMoney.com) - I'm 33 years old and have $75,000 saved in my 401(k). I make $70,000 a year and contribute 10 percent of my salary to my 401(k). My company then matches the first 6 percent. Am I on track to retire at 55, or should I open a Roth IRA to supplement my 401(k)?

- Bob, Meriden, Connecticut

You certainly appear to be on track toward a secure retirement in that you've already accumulated a decent size and you're contributing regularly to your 401(k).

But by shooting for an early retirement, you've upped the bar considerably. You'll have less time to accumulate the savings you'll need in retirement, and you'll be drawing on those savings for a longer time. That sort of double-whammy is what makes early retirement more difficult, although by no means impossible, to achieve.

Getting a guesstimate

To get a sense of whether you're on course for your goal, I went to a retirement planning calculator available through the Alliance Bernstein site called Where Am I Heading?. The calculator projects the amount of income you're likely to be able to draw from your investments at retirement, given how much you've already saved and how much you're putting away on a regular basis.

I plugged in your information, assuming you would retire at 55 and live to age 95. Here's what I found. The calculator estimated that if you retire at 55, you would have a 95 percent chance of having $30,000 a year, an 85 percent chance of having $35,000 and a 75 percent chance of having $38,000. All of these amounts are in today's dollars, which means they're adjusted to take inflation into account.

Of course, you'll also qualify for Social Security. For an estimate of the benefit you would receive from that program, you can check out the Social Security benefits calculator. Again, I plugged in information for a person your age with your salary and got a rough estimate of about $8,900 a year in today's dollars. (This assumes you begin taking Social Security when you reach age 62.)

So the question is this: Do you think you would be able to retire at 55 on an income somewhere between $30,000 and $38,000, considering that you're living on $70,000 (minus what you save) now? You would also get Social Security, but that wouldn't kick in for another seven years.

Obviously, the answer depends on what sort of retirement lifestyle you see yourself leading. But I think you would be cutting it kind of close. I know I would like to have a bigger margin.

What are your choices?

Well, one of the neat things about this calculator is that you can re-do the figures using different assumptions. Hold off retiring until 65, and the income projections range from $70,000 to $86,000. Stick to the 55 target date but assume a higher rate of saving, say, 16 percent to get an additional $4,000 in savings this year (which happens to be the max for an IRA contribution), and the projections range from $38,000 to $48,000. Hold off until age 65 to retire and increase your savings, and the projections look a lot better, $90,000 to $110,000.

Now none of these figures should be considered carved in stone. There's a good amount of squishiness in any projection, especially one going out more than 20 years. A lot can happen over that time. You could be forced out of your job into a lower-paying one that could disrupt your savings plan or the markets could go into a major funk, lowering your returns.

What's more, calculators like this make a lot of assumptions about how your money is invested, what rate of return you'll earn, how you'll convert a lump sum in a retirement account into income, etc. That's fine to the extent these assumptions apply to you. But I see these sorts of calculators as a tool to give you a decent sense of how you're doing.

If you want a more personalized projection - which certainly makes sense as you get into your 40s and 50s - you should check out tools or software that allow you to fine-tune the assumptions for your situation. Or you might go to an adviser. Many 401(k) plans now also offer decent retirement-planning tools and, for that matter, more and more are offering personalized advice.

To sum up, I'd say you certainly appear to be on track to a comfortable retirement, although whether you'll be able to start taking it at 55 is an open question. And I don't think there's any doubt that opening that Roth IRA can dramatically improve your chances, and make for a more secure retirement even if you don't start it at 55.

Tell us your story: Have you found your passion post-retirement? MONEY Magazine is looking for retirees between the ages of 50 and 70 who have redefined themselves - by finding new love, discovering a hobby, starting a business, etc. E-mail your story, along with your name, age, location, and daytime phone number, to dmosher@moneymail.com.


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