Sunday, February 17, 2008

Your Biggest Money Worries, Solved ! #4 I Don't know how much to Save for Retirement

Worry 4: I Don’t Know How Much to Save for Retirement
In an ideal world, you would be saving 15 percent of your income each year in a retirement account, says Peggy Cabaniss, a financial planner in Lafayette, California: “Doing so would ensure you’d have plenty for a comfortable retirement.” In the real world, few people come close to this goal. Because each person’s financial picture is a little different and there are lots of variables to factor in, you need to run the numbers. Thanks to handy online calculators, though, you don’t need to do any of the tiresome math yourself.

Do Right Now:
If you have not opened a 401(k) or RRSP, do so now (see “I Save Too Little” ). Already have one? Great, now check to make sure you’re putting in the maximum allowed. That amount varies from company to company. If your employer doesn’t offer a 401(k), open an individual retirement account (IRA) at your bank or with a mutual-fund company. If you are self-employed or have self-employment income, consider opening a SEP-IRA. You can contribute as much as 20 percent of your self-employment income, up to $46,000 a year. And just like a 401(k), the money you’re contributing is pretax dollars.

Dig up the following documents (for both you and your spouse, if you have one) and stick them together in a folder. You will need to refer to them when you start plugging in your numbers.The most recent statement for your employer-provided retirement savings plan, such as a 401(k). If you can’t find it, call the toll-free number (or go to the website) of the investment company (such as Fidelity or Schwab) that handles the plan and ask for a copy. Most of these companies also let you view your accounts online.The latest statements for any other retirement accounts you may have, including IRAs, 401(k)s from previous employers, and SEP-IRAs.The Social Security statement that the government sends you each year. If you threw it away or never got one, request a copy at
Paperwork about your pension plan, if any. According to the Employee Benefit Research Institute, only 18 percent of nongovernment workers will receive a traditional pension, which the employer pays for in full rather than requiring the employee to kick in money. If you’re lucky enough to be one of them, you’ll want to factor those numbers in. If you’re not sure of your status, call your employer’s benefits coordinator and ask.

Next Steps:
Visit a free online calculator. Try the version offered by Money Magazine (which, like Real Simple, is owned by Time Inc.) at After you plug in the numbers from the documents you’ve collected, enter some other facts (like your tax rate), and choose how aggressively your nest egg is invested, the calculator will tell you how much money you will need to live comfortably when you say sayonara to your salary.The cool part is that you can play around with the numbers. What if I retire two years later? What if Social Security goes kerflooey? What if I change the way my money is invested? Then you can come up with several different game plans to choose from. For example, you may learn that if you move your 401(k) stash from mostly bonds to mostly stocks, you’ll be able to save $200 less a month starting now and still reach your retirement goal.

If calculators leave you cold, or just plain bored, consider making an appointment with a financial planner (see “I Need to Develop a Financial Plan”) for a personalized assessment of your savings situation.