Getting real about early retirement

NEW YORK (Money) -- Question: I'm 32 years old and average about $100,000 a year in salary. I have $35,000 in my 401(k) and have just started saving $500 a month. My company matches 4 percent of my salary. How do I stand on being able to retire at 62? -Darin, Canby, Oregon

Answer: Okay, so if I understand your situation correctly, you're saving $6,000 a year, or 6 percent of your salary, and your employer kicks in $4,000, or 4 percent of your salary, bringing your savings to $10,000 a year, or 10 percent of salary. And you've already got $35,000 socked away in your 401(k).

Given that there are a lot of other variables involved in evaluating your prospects, including how you invest your savings and what sort of lifestyle you envision in retirement - and the fact that a lot of things can happen over the course of 30 years - it's difficult to come to a highly accurate assessment of whether you'll be able to call it quits at 62. But I'll give it a try.

My take: I think you're going to have to step up your savings effort if you want to have a realistic shot of an early exit. Even factoring in the money you've already got in your 401(k), I doubt saving 10 percent is going to be enough to allow you to retire at 62.

How do I arrive at that conclusion? Well, it just so happens that research recently published in the Journal of Financial Planning takes a pretty rigorous look at how much one needs to save at different ages and income levels in order to fund a comfortable retirement. The research also factors in any savings you already have.

As you might expect, the researchers have to make lots of assumptions - in this case, one of the key ones is that you'll want to retire on 80 percent of your pre-retirement salary after deducting the amount you save each year (after all, you're not living on the money you save) - which means their scenario might not fit yours (or anyone else's) precisely. Still, I think the figures offer a pretty good guideline for what people ought to shoot for in terms of annual savings.

Anyone who wants to see how their savings effort stacks up can read the paper itself by clicking here. Or you can take the easy way out and go to the "What You Need To Save" calculator we created based on the research. (You can also read my recent Long View column setting target savings rates for retirement, by clicking here.)

Our calculator provides target savings rates for a variety of ages and incomes. So normally, you would just go to the calculator, plug in your age, income and the amount you have saved and - voila -you get an estimate of how much you should be saving each year.

In your case, though, we'll have to do things a bit differently since the calculator doesn't allow for a $100,000 income until age 35. (What can I say? Not that many people in their early 30's pull down a hundred thou a year.) So what we'll do is fast-forward to where you will likely be in three years at age 35.

If you continue your savings regimen and earn a reasonable 8 percent a year on your money, your 401(k) will be worth just over $44,000, while your new 401(k) contributions plus the employer match will total roughly $34,000. Thus, we'll assume that at 35 you will be saving 10 percent of salary and will have $78,000 tucked away in your 401(k). (For simplicity's sake - and because $100,000 is the top salary the researchers considered for 35-year-olds - we'll also assume you still earn a hundred grand.)

So if you go to our calculator and plug in your information, you'll see that someone who is 35 years old, has $78,000 saved and earns $100,000 should be saving about 15 percent of salary per year, considerably more than the 10 percent you're putting away (including your employer's match).

And, in fact, you probably need to do even more than the calculator suggests. Why? Well, another one of the assumptions in this research is that you will retire at 65. Since you want to call it a career at 62, you'll have to fund a longer retirement and you'll have fewer work years to do so, which means you'll have to save even more.

Now, I'll be the first to admit that this 15 percent estimate is only a guideline and the amount you'll need to save could be quite higher or lower. You may be able to retire while saving less if you'll receive a traditional check-a-month pension from an employer. (Remember, though, such pensions are going the way of the hula-hoop and only 20 percent or so of current workers are in line for one). Similarly, you may not need to save as much if you plan on working in retirement or turning the equity in your home into income by taking out a reverse mortgage (although I don't think anyone should be counting too much on work or income from home equity when creating a retirement plan).

It's also possible, of course, that you might need to save more if you plan on living large in retirement or if the financial markets deliver particularly tepid returns over the course of your career or if, heaven forbid, Social Security benefits are scaled back some time in the future.

If I were you and wanted a realistic shot at being able to step off the old work treadmill in my early '60's, I think I'd err on the side of saving too much rather than too little, since too little might mean having to stick it out several more years just when you really want to cut loose.

The other thing I would do if I were really interested in early retirement is read over the Retire Early cover story in Money's April issue. It will give you a good idea of the sorts of planning moves you should be considering beyond setting a savings rate if you really want to exit your career early. Some of the advice may be too early for a youngster like yourself. I'm thinking of guidance on deciding how you really want to live your life in retirement and practical matters like how to how to make sure you've got adequate medical coverage until Medicare kicks in. But even at your age it's a good idea to know the scope of planning early retirement actually requires.

As you progress in your career, you'll want to check periodically whether you're making progress toward your goal. You can do that by going back to our "What You Need To Save" calculator. But for an analysis that's more tailored to your situation, you may want to try our Retirement Planner tool, which assesses your odds of being able to achieve a given level of retirement income based on the financial information you plug in. You could also have an adviser periodically run the numbers for you as well. The closer you get to retirement, the more realistic the assessment will be.

Of course, if you want that realistic assessment later in your career to be a positive one, then I'd recommend you crank up your savings now. If you fail to save enough while you're young, you may find that the amount of money you'll have to stash away at, say, 50 or 55 to meet your goal of taking leave of corporate life at 62 will be so onerous that you have no other choice but to delay retirement, or scale back your plans.

So try funneling more cash into that 401(k). (I'd be surprised if your employer limits you to 6 percent.) Once you've done that, consider savings opportunities beyond your company plan. (For suggestions, click here) After all, the earlier you start really plowing the bucks away, the more leeway you'll have for setting a retirement date later on.