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

Jeffrey Jacobi, a Katy, Texas, air conditioning contractor, plans to retire soon. Or he did. He’s not so sure now, given the current economic crisis. The 66-year-old has been steadily socking away enough savings to let him and his wife enjoy the equivalent of 100 percent of their salary over three decades of retirement. But even so, he wonders, will it be adequate? “Until now, I was feeling pretty confident that I had done a good job preparing for our retirement, but now I’m worried that it’s not going to be enough,” he said. “Our retirement portfolio is down nearly 30 percent in the last month. With the Wall Street bailout, everything is so uncertain. And now they’re talking about a recession that could last anywhere from three to eight years.”

Jacobi is not alone. Call it the new retirement math. As recently as 2006, most financial planners routinely advised clients to put away around 70 percent of their final year’s pay for each year the life expectancy charts predicted they would live as a retiree. But even before the recent credit crunch and fears of a global recession hit, a new consensus was building, with many advisers and retirement experts tossing out figures closer to 110 percent and up.

According to a recent Ernst & Young report, middle-income Americans entering retirement now with savings equal to 59 to 71 percent of their preretirement wages will have to reduce their standard of living by an average of 24 percent to minimize the likelihood of outliving their financial assets. Those Americans seven years out from retirement are even less prepared, and the study estimates that they will have to reduce their standard of living by even more, an average of 37 percent.

“Many Americans envision a retirement where their lifestyle continues much as before,” said Tom Neubig of Ernst & Young. “Our work shows that this is often not a realistic expectation and that, with the current state of savings and potentially very long life expectancies, many retirees will have to cut back far more on expenditures than they expected.”

For people who don’t want to risk living on 70 percent of their current income, “the agonizing issue,” said Susan Stewart, president of Charter Financial Group in Bethesda, Md., “is that many have to save more, spend less and work longer before they retire.”

That’s the situation Jacobi finds himself in. He and his wife, Carole, a 61-year-old accountant, have been living well below their means for years. “We’ve never been big spenders and have worked hard to save enough to retire without worry,” he said. Plus, they have successfully paid off the mortgage on their home and hold the title to Jacobi’s workshop. Even better, Jeff thinks he can rent his shop out for a couple of thousand dollars a month. Sweet cash flow. “But you never know, it’s possible we could have another 30 years of living ahead of us. And any way you look at the economic picture now, it’s not going to be good.”

The Jacobis’ new savings target: 105 percent of their current annual earnings, multiplied by 30 years.

That’s a whopping amount to fathom, but it’s not as much as it first appears. The couple figure their current yearly living expenses clock in around $57,000, and their current retirement plan projections, combined with Social Security payouts, cover only that plus some wiggle room to enjoy some travel and address rising health care costs. So although Jacobi could have chosen to retire this year, he’s going to hang in there another three years, until 2011, just to be sure he will have enough.

“I don’t want them to fail in retirement, and so I’m extremely conservative and have created a realistic plan for them,” said financial planner Marc Schindler of Pivot Point Advisors in Bellaire, Texas, who has been guiding the couple through the process.

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