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Retirement
Feather Your Nest EggWhen WorldCom filed for bankruptcy in July 2003, employee Ken Donaldson lost nearly 30% of his retirement savings, which was tied up in company stock. "I didn't plan to be retired in my early 50s," says Donaldson, who lives in Atlanta with his wife and two children and is looking for a new job. "After I left WorldCom in August 2002, I was scared and shifted almost all my assets into money market accounts. Now I'm investing a little at a time based on my asset allocation and how much I'll need to live on in about 15 years."
DO estimate how much cash you'll need each year to sustain your standard of living when you reach retirement. With this yearly sum in mind, calculate how big your nest egg has to be to produce that income stream, assuming your portfolio's value earns a conservative 5% to 6% a year. Then factor in the taxes you'll owe on the assets you withdraw from your IRA and other retirement accounts.
For example, if you'll need $50,000 a year to cover your annual retirement costs starting at age 65, you'll need to have saved $1.3 million, assuming the nest egg earns 5% a year and that your income will be taxed at the 25% rate. "That's a sobering number, especially today," says Evensky. "It makes people realize that every dollar that remains in their account counts and that they have their work cut out for them. But it can be done."
DO save as much as possible in accounts that grow tax-deferred to take full advantage of compounding. This year you can save up to $3,000 in an IRA; if you're age 50 or older, you can save up to $3,500. The money you save in taxable accounts can be invested in a low-fee municipal bond fund to minimize the taxes you'll owe, says Evensky.
DO consider boosting your 401(k) contribution if your company re-duces or stops its match to cut costs, suggests Evensky. Think the loss of a company's match isn't a big deal? Say, for example, your company stopped contributing $6,000 a year to your plan. If you and your spouse invest $3,000 each annually in IRAs, after 15 years at, let's say, 7.8%, you'll have $160,000. That's the amount your employer's matching contributions would have earned. In fact, think about increasing your IRA, or even saving in taxable accounts, to make up the lost amount, Evensky explains.
You don't need an MBA, a special talent or tons of luck to keep more of your money. All you need is a plan and a $2 calculator.
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