YOUR RETIREMENT
PLAN, SAVE & MAKE YOUR MONEY LAST
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Faced with frozen pensions, disappearing retiree health benefits and lengthy retirements, many Americans are choosing to work longer to provide for a comfortable future. Nearly one in four people between the ages of 65 and 74 were working or looking for work last year, according to the Census Bureau, up from 20% in 2000.
Still, the dream of dropping out of the workforce a few years -- or even decades -- ahead of schedule lives on. One such dreamer is Brian Fouch. Fouch lives in Lexington, Ky., where he is a human resources specialist with Toyota. His goal is to call it quits in 15 years, when he'll be 51. To make that happen, he's socking away 21% of his gross salary, including both his personal contributions to his 401(k) plan and his employer's match, and he hopes to boost the total to 24% soon.
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As Fouch has already learned, the key to retiring early is starting early to amass a nest egg that will carry through until traditional retirement benefits kick in. Quit before age 62 and you'll have to support yourself without the help of Social Security. And you won't be eligible for Medicare until age 65.
Access to employer-subsidized health benefits is a critical part of Fouch's plan. By age 51, he'll have 25 years of service with Toyota, and under current company rules he will qualify for full retiree health benefits. Most workers aren't so fortunate: Higher costs and limited availability outside the workplace often make health insurance a major factor that keeps workers on the job longer, reports the Employee Benefit Research Institute.
Early retirees do have ways to get health insurance (read "You Can Get Health Coverage"), and you can expect more insurers to introduce policies aimed at this market. In the meantime, a big nest egg gives you more choices. So does understanding tax rules that let you have early access to your retirement savings without paying a penalty.
And who knows? You may discover that all you need is a retirement sabbatical to recharge your battery for your second act, which may include a part-time job or a whole new career.
Save like crazy
One widely accepted rule of thumb is that you should save at least 15% of your gross income (including any help you get from the boss) to provide for a comfortable 30-year retirement. Move your timeline up by a decade and you may need to save twice as much, or even more.
Christine Fahlund, senior financial planner for T. Rowe Price, offers the following example: A 35-year-old who has already saved the equivalent of one year's salary and continues to save 15% a year for 30 years should be able to replace about half of his salary from savings if he retires at 65. Social Security benefits, pension checks and other sources of retirement income, such as annuities or earnings from a part-time job, would make up the rest. (You'll no longer have to save 15% of your salary once you retire, so you should be able to maintain your current lifestyle on about 85% of your preretirement income. But that can vary widely depending on your actual expenses.)
To retire ten years sooner, says Fahlund, that same 35-year-old would have to boost his savings to nearly 40% of his salary. Or, to keep his salary-deferral rate at 15% and still be able to replace half his income in 20 years, he would need to have already saved more than four times his current salary.
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