Retire without pinching pennies

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NEW YORK (Money) -- Question: I'm 59 years old, earn $125,000 a year and plan on working until I am eligible for full Social Security benefits. I have about $1.6 million that's invested in a number of retirement accounts (mostly tax-deferred, but I have a Roth IRA too) and I own an investment property worth about $390,000.

In addition to contributing to my company's retirement savings plan, I also save another $30,000 a year. I would like to retire with the same income I have now without going over a 4 percent withdrawal rate. Is this possible, assuming I invest in a conservative equity portfolio that earns a below average return? - Jim, Saute Ste. Marie, Mich.

Answer: I never like to say that something is a totally done deal. After all, we are going through a shaky period in the economy and the markets, and a lot can happen between now and the time you retire.

Based on the information you've given me, however, it seems you've got a very good shot at achieving your goal, although I do wonder whether you'll need the same income you have now in order to enjoy retirement.

But more on that point later. Let's do a few off-the-cuff calculations to see where you stand.

You say you invest in a conservative equity portfolio that earns a below-average return. Well, I don't know what you consider below average. But since you strike me as a pretty conservative guy, let's assume you earn a 6 percent annual return over the next eight years. That means your $1.6 million would grow to just under $2.6 million. Let's call it $2.5 million.

You don't mention how much you contribute to your company plan, so I'll leave that out for the time being. But if you earn the same 6 percent annual return on the $30,000 a year you invest in other accounts, that would give you another $300,000 or so, bringing your retirement stash to roughly $2.8 million. Limiting yourself to an initial draw of 4 percent on that amount, would give you income of about $112,000.

That's before Social Security, though. You can get a more accurate estimate of your benefit by using one of the calculators on the Social Security site. But just for argument's sake, let's assume that when you retire in 2015 or 2016 that you get $3,000 a month. (Yes, this sounds high, but you're a relatively high earner, plus this is your benefit in future dollars, not today's dollars.)

Add that $36,000 to the $112,000 from your investments, and you've got retirement income of about $148,000 a year. That's more than your $125,000, but, remember, you're earning $125,000 in today's dollars. If we figure you'll get raises of, say, 3 percent a year, you would have income of about $158,000 by the time you retire.

That would leave you about $10,000 short of your goal, except that we haven't factored in the additional savings you'll be pumping into your company savings plan over the next eight years. Nor have we included the $390,000 investment property. Throw in those two things, and I think you could very easily reach or exceed your pre-retirement salary.

I hasten to add that I would not make retirement plans on the basis of little exercise alone. There are a lot of details I've left out - taxes on your investments being one - and for simplicity's sake I've assumed you'll earn the same rate of return year after year. Just take a look at stock and bond returns since the beginning of this decade, and you know that won't happen.

So at the very least, I think you should take a more meticulous look at where you stand by plugging your info into an online calculator like Fidelity's Retirement Income Planner tool, which is free even if you're not a Fidelity customer (although you do have to register at the site). Or you might consult a financial planner or other adviser who can run the numbers for you. (For advice on getting help, click here.)

But based on this cursory look, you appear to be in very good shape. The big lesson to be drawn from your situation, however, is just how much leeway you have for planning your retirement when you've got a nice pile of savings tucked away. Even if things don't go swimmingly over the next few years, you appear to have enough of a margin so that you would still be able to retire comfortably.

That's not to say that a big setback in the markets couldn't force you to scale back your plans or make other adjustments. But the bigger the cushion of savings you have heading into retirement, the more choices and options you have.

One final note. I questioned earlier on whether you really need to replace your current salary in retirement. Why? Well, you're saving more than $30,000 a year on a salary of $125,000, which means you're actually living on less than $95,000 a year.

Maybe you plan on kicking your lifestyle up a notch or two in retirement, which is fine. But when you do that more detailed analysis that I recommended (either on your own or with an adviser), I recommend you think long and hard about how you actually plan to live in retirement and then put some numbers to that retirement vision. (Or, to put it another way, do some "lifestyle planning.")

This will give you a much better sense of how much retirement income you'll actually need, and help you better plan in the years you still have before calling it a career.