12 years to early retirement - the race is on
This Colorado couple has plenty in savings. But early retirement isn't a no-brainer.
By Walter Updegrave, MONEY Magazine senior editor

NEW YORK (MONEY) -- QUESTION: I'm 43, my wife is 40, we earn $130,000 a year and we're trying to figure out if we're on the right track to retire when I turn 55. We have $350,000 in our 401(k)s, another $110,000 in a company pension plan, $12,000 in a Roth IRA and $20,000 in mutual funds, most of which is invested in a diversified group of stocks. We also have $100,000 invested in several individual stocks.

In the meantime, we contribute the max to our 401(k)s each year - $28,000 combined this year - and we put $1,000 a month into our mutual fund account.

Our house is worth about $260,000, and we have no debt (or kids). If we stay on this path, do you think we have a shot at retiring in 12 years or so? -- W. T., Boulder, Colo.

ANSWER: That depends in large part on how much income you'll need after you retire, not to mention on how well your various investments perform. But assuming you're not talking about a lavish retirement and you're willing to be flexible, I'd say it looks like you've got a pretty good shot.

For argument's sake, let's just say you're going to need $100,000 of annual income the year you retire and that this figure will have to increase with inflation each year so that you maintain your purchasing power throughout retirement.

Can the amount you've saved already, combined what you're putting away plus other income sources such as Social Security, generate that income?

Let's do a rough back-of-the-envelope analysis.

WHAT SAVINGS WILL GROW TO Let's start with the savings you already have. If you total your 401(k)s, the Roth IRA, the mutual funds, the money in your company pension and the amount you've got invested in individual stocks, you've got a total of $592,000. If you earn, say, 8 percent a year on that sum over the next 12 years, by the time you're 55 you would have roughly $1.5 million.

In the meantime, though, you're also socking away $40,000 a year in your 401(k)s and mutual funds. If you also earn 8 percent a year on that money, you would have an additional $800,000 or so after 12 years, giving you a total of about $2.3 million at age 55.

THE DRAW DOWN PHASE As a rule of thumb, you probably want to limit your withdrawal from your savings in the first year of retirement to 4 percent of your portfolio's value, and then increase the dollar amount of that withdrawal by the inflation rate each year.

A 4 percent withdrawal might seem miserly, but remember: You're going to be increasing your draw for inflation each year, and you're going to be in retirement a long, long time.

In any case, if you withdraw 4 percent of your projected portfolio's value at 55, you're talking about a withdrawal of $92,000 - not quite the $100,000 target we set, but pretty darn close.

Eventually, of course, you and your wife would begin collecting Social Security, which would put you well above the target.

OTHER OPTIONS If you find you can't or just don't want to get by with less than $100,000 until then, you have a couple of options.

You could ask your wife, who's three years younger than you, to continue to work until she's 55. Or you could work a couple of extra years. Or you could draw a bit more from your portfolio early in retirement with the idea of cutting back your spending later in retirement, on the theory that you'll travel less and be less active as you age. (As I explain in a previous column, however, I wouldn't count on spending less as you age.

If things get tight, you do always have your house to fall back on. You could always tap that equity by downsizing to a less expensive place, or you could stay in the old homestead and turn your equity into income by taking out a reverse mortgage. (More on reverse mortgages and how much you can get.)

Plan B

I want to stress that the little analysis we've just gone through is rough, very rough, and I certainly wouldn't plan my retirement on the strength of these figures alone.

For one thing, I've assumed a constant annual rate of return. In the real world, your return will fluctuate, which will affect the value of your portfolio when you're putting money in and pulling it out.

You can get a much better sense of how prepared you are by going to our Retirement Planner, which uses computerized simulations to calculate your odds of success.

And you might also want to consider at some point having an adviser run various scenarios for you to see how your odds of success might change if, say, you invest differently, or hold off retiring a few years or perhaps delay taking Social Security so you'll qualify for a larger payment later on.

I'd add that 55 is a rather early age to stop working entirely, given that many people are living well into their 90s these days. You and your wife may want to consider moving back and forth into the workforce occasionally, if not for the money itself (which, make no mistake, can ease the pressure on your portfolio) then just to stay sharp and engaged.

You'll also want to monitor your spending and the size of your nest egg throughout retirement. As many people who retired in early 2000 can attest, a severe bear market can put a big dent in your portfolio's value. So you want to be ready to make adjustments such as trimming spending if necessary to assure you don't run out of money before you run out of time.

For now, though, the single most important thing you can do is to continue plowing savings into your 401(k) and other accounts. Projecting your odds of retiring through sophisticated computerized simulations is nice. But, to paraphrase Bogie in Casablanca, it doesn't amount to a hill of beans if you don't sock away the bucks.


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