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Crunching the Numbers: How Much Do You Need to Retire?

Planning early retirement?

Those eyeing an early getaway in their 50s will need even bigger nest eggs. Stewart had one client, a 54-year-old mid-level health care company manager living near San Francisco, who was earning around $60,000 a year until a year ago. In March she arrived at Stewart’s office, via a friend’s recommendation, in distress. She had decided to retire early with the blessing of a former financial planner. She had roughly $400,000 stockpiled in her 401(k) and $300,000 in equity built up in her home. The planner advised her to roll all the 401(k) proceeds into an IRA that was structured so she could begin taking periodic annual distributions without the 10 percent penalty.

So she did. She reasoned she could do that until it ran out, then maybe she’d be old enough to collect Social Security and tap into the equity in her home via a reverse mortgage. But it soon became clear that her portfolio was too small to support her.

Falling markets had slammed the woman’s retirement account. “I simply told her she had to go back to work, even at the cosmetics counter at Macy’s, where she could get some health insurance at least,” Stewart recalls. “Not what she had expected to hear, but I’m not a magician. To retire early today, you need to have substantial savings, enough so that the fluctuation in the stock market by 25 percent won’t cause you any material suffering beyond the mental angst it induces.”

In the good old days, living on 70 or 80 percent of current annual earnings was a reasonable figure for many because the cost of living was expected to decline for the majority of retirees. Children were grown; taxes were reduced; transportation costs to and from work and other job-related expenses were erased. Moreover, retirees were likely to sell the family home and move to smaller quarters in a part of the country with a lower cost of living. Sure, they might do some traveling initially, but with age and declining health, the assumption was that travel, too, would level off. And for many, it all held true.

A new financial world

But the times, they are a-changin’—at a perilous speed. The new financial world of retirement that boomers are facing is drastically different from yesterday’s, and it is rapidly roiling every facet of a retiree’s life planning. Some of the factors at work:

• We’re living longer. New medicines and technology have ratcheted up life expectancies. Most people may be facing two or three decades of retirement, and so the basic cost of living rises in tandem with an extended life span.

• Inflation is rising. Multiply your extended retirement years by increasing inflation—this year, nearly double-digit—and paying your basic living expenses on a fixed income looks harder and harder. In July, for example, the annual increase in overall finished goods (producer price index) was 9.8 percent, the biggest 12-month jump since the early 1980s, according to Bureau of Labor Statistics industry data. No one knows how long this might last, but “at that level, inflation will erode our savings very quickly,” Jacobi says.

• Pensions are declining. Workers are increasingly leaving the workforce without the cushion of a defined benefit plan, in which an employer provides a specific income for retired employees, either as a lump sum, as a pension or as a lifetime annuity. A mere 20 percent of U.S. private industry workers participate in such plans now, down from 80 percent in 1985, according to the Bureau of Labor Statistics. Instead, they rely on their own savings in a tax-deferred 401(k) plan, matched only partially by employer funds. Retirement funds like 401(k)s and IRAs are also typically invested in stock and bond funds, which are subject to the fluctuations of financial markets. In recent months, that has been terrible news for retirement portfolios, which have been reduced by 30 percent or more in some cases.

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