NEW YORK (CNN/Money) -
I want to know how much I should be saving for retirement. I entered the workforce late (in my mid-40s), so I am terrified of not having enough money to retire. I'm working a second job to increase my retirement savings, but I'm wondering if I'll ever be able to quit work.
-- Susan, Birmingham, Alabama
If it's any consolation, you're not alone. There are many people like yourself who got a late start in their careers and didn't have a chance to put away savings early on in their lives. There are also the people who have been working all along, but who put off saving until some vague future date.
And then, of course, there are the people who did all the right things -- worked, saved diligently and invested -- but who saw the market collapse of the past two years undo much of their hard work.
It's never too late
Before we get to the nitty-gritty of your question, let me give two words of advice to you and anyone else who falls into the groups I described above: Don't despair!
At the risk of sounding Pollyanna-ish, I think it's important to remember that there is always something you can do to improve your retirement prospects no matter how far behind you may have fallen in accumulating a retirement fund or no matter how badly imploding stock prices have cracked your nest egg. That's not to say you'll get the retirement of your dreams. But you'll certainly do better than if you give up.
In your case, of course, it looks like giving up is the last thing on your mind. I admire your idea of taking on a second job to increase your savings. In fact, ramping up your savings is the best way to make up for lost time or stock-market losses.
If any of your jobs offers you access to a tax-deferred retirement savings plans like a 401(k) or 403(b) plan, contribute the max.
Use the new "catch-up" rules
Remember, too, that last year's tax bill also has some provisions that may help. Starting this year, for example, anyone 50 or older can begin making "catch up" contributions to a 401(k) or 403(b) to the tune of an extra $1,000 this year, an amount that rises by $1,000 each year until it hits $5,000 in 2006. (The plan rules must allow such contributions. But if your plan doesn't, there's no reason you can't lobby for a change.)
These catch-up contributions are on top of any regular contributions you make. And there, too, the 2001 tax bill may help because it raises the maximum allowable contribution to $11,000 this year, an amount that rises by a grand each year until maxing out at $15,000 in 2006. (For a look at the maximum allowable contribution limits through 2006, click here.)
After you've maxed out your 401(k), see if you also can take advantage of vehicles like traditional or Roth IRAs. (For help determining your eligibility, check out our Money 101 lesson on IRAs.)
But will it be enough?
Okay, so how do you know if whatever amount you're saving will be enough? Getting an answer to that question requires a bit of number crunching, which is best done with retirement planning software or an online calculator, such as our Retirement Planner.
You begin by plugging in some basic information such as your age, when you plan to retire and how long you think you'll live. I recommend planning for a ripe old age like 95 or 100. Or you can estimate your life expectancy by going to the Longevity Game in the calculator section of Northwestern Mutual's online Learning Center.
Then you set an income goal. As a rough estimate you can choose a percentage of your current income. I suggest choosing at least 70 percent, but you should go with a higher figure if you envision doing a lot of traveling or otherwise living high in retirement.
Next, list the income you expect from Social Security and other pensions, if any. (Many sites will calculate your estimated Social Security benefits, as ours will.) Subtract that amount from your target income, and that's the amount you'll have to get from your retirement investments.
To find out whether you're on the right track toward accumulating enough assets to get you to your target income, you go through a process that boils down to this: you plug into our calculator the amount of savings you already have, then how much you expect to save each month and then the return you think you're likely to earn. Our calculator will then give you the odds that your current plus expected future savings will get you to your income goal.
No calculator is going to give you an absolutely correct answer. There are just too many unknowns involved -- the rate of return, whether you'll actually save as much as you think, etc. -- to be that precise. But if you go through this exercise a few times and alter assumptions such as your savings rate, retirement date and rate of return, you'll get a sense of how much you realistically must save in order to generate an adequate retirement income.
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One last thing: you wonder whether you'll ever be able to quit work. Well, one thing that retirement researchers are finding is that the very notion of retirement is changing. These days it doesn't necessarily mean stopping work completely. Some retirees work part-time, while others move in and out of the workforce.
One reason they do this is because the extra money they earn takes some of the strain off their retirement investing portfolio. Basically, you don't have to acquire as much money prior to retirement if you're willing to work a bit during retirement. But researchers also find that working makes retirees more connected and engaged in life.
So while you certainly don't want to be forced to spend your golden years working 40-hour shifts at McDonald's, it's not a bad idea to plan on doing some sort of work after you retire. The extra income can help make up for savings you weren't able to put aside during your career, and the work itself may make your retirement more enjoyable.
Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged." He can be seen regularly Monday mornings at 8:40 am on CNNfn.