shade on the conservative side. “It’s hard to generalize, but you might be able to live on 5%, even 6% distributions, and still not run out of money,” says Harris. “The less you’re concerned about leaving money to your heirs, the more you can spend on your own retirement.”
If you take 5% as the happy median, you have a nice round number to work with. Multiply the amount of income you’ll need by 20, and you’ll come up with a target amount. To withdraw $50,000 per year, you’d need $1 million. If you’ll settle for a leaner lifestyle and you’ll need only $25,000 per year from retirement funds and your investment portfolio, a $500,000 nest egg will suffice.
Of course, putting together even $500,000 isn’t easy. How do you go about it?
Pay off your debts. Once your home mortgage and children’s college loans are behind you, your retirement income will stretch a lot farther.
Carl R. Chandler, 69, a semi-retired installer of alarm systems who lives in Harvard, Massachusetts, not only has paid off the mortgage on his own home, but also owns several apartment buildings outright or with family members. All are debt free.
“I generally buy properties from troubled owners, so the price is right,” says Chandler. “If you buy on an all-cash basis, you can get positive cash flow from rents. Now, if I reach the point where I don’t want to manage the properties myself, I can either hire a management company or sell the properties and reinvest the proceeds in stocks and bonds.”
The sooner you begin, the longer the power of compounding earnings is on your side. Nevertheless, even at age 50 or 55, you have 10-15 years to build your retirement fund.
Invest substantially. Take full advantage of employer-sponsored plans such as 401 (k)s and add extra savings as well. Melvin Carrington Smith, who retired at age 48, says that he and his wife often managed to invest 30% of their income. “You can save more than you realize by cutting back on your spending,” he says. “We buy everything for cash, including cars, and we’ve discovered you’re in a much better position to negotiate if you’re paying in full.”
Joe Haywood, a financial planner with AFP Group in Los Angeles, says that the new tax law creates additional opportunities for savings. “Starting in 1998, more people will be able to deduct IRA contributions,” he says. “Also, there will be a new Roth IRA that’s nondeductible but can eventually provide completely tax-free distributions. The more you take advantage of these vehicles, the greater a retirement fund you can build up.”
According to the conventional wisdom we’ve all heard time and again, retirement savings should always be tucked away in a nice safe investment, preferably bonds. The old mode of thinking was that investors should turn conservative as they near retirement: moving money from stocks to bonds in order to reduce their exposure to the ups and downs of the market. Well, the times have changed somewhat from