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Saving for Retirement

Looking for Your Magic Number

How much would it take to cut back early?

Lindsay Bennett seems to have it made. With a six-figure income, she earns enough selling corporate software to sock away $19,000 a year in retirement accounts and still have money to spare. She has more than $135,000 in IRAs and a 401(k) plan, and $50,000 in the bank. Plus, she owns a home in Boston. But Lindsay, who is 30 and single, wants to do more than accumulate wealth. Within 15 or 20 years, she'd like to move to the not-for-profit world. That will almost certainly mean a big cut in pay.

Lindsay is better able than most to imagine downsizing. The key is how large a nest egg she needs to amass to manage reduced earnings without exhausting her savings too soon. "What is the magic number for something like this?" she asks.

Hidden costs. Retiring -- or dramatically cutting back -- in your mid forties requires a vastly different calculus than retiring in your mid sixties. At normal retirement age, you're covered by Social Security and Medicare, and your life expectancy is perhaps 20 years. But if you exit at 45, you could easily live another 40 years. You may stop contributing to retirement accounts, and if you tap them early, you'll have to pay penalties as well as income taxes. You will also forgo much potential growth.

But because Lindsay is off to a fast start, she may be able to pull it off. She needs to build a nest egg outside of retirement accounts that's large enough -- the magic number -- to produce principal and income that, when combined with a lower salary, offsets expenses, says Jim Corbeau, of Maas Capital Advisors, in Eugene, Ore. That way, she can leave her retirement accounts intact for old age.


Estimating the magic number requires making assumptions. Lindsay says her expenses are $55,000 a year. In 15 years, assuming 3% annual inflation, her yearly costs would total $85,000. If Lindsay can live on 20% less and gross $45,000 a year ($30,000 in today's dollars) in a new career, she'll still have to take about $4,500 a month from investments (assuming a 25% tax bracket).

To draw that much for 22 years -- from 45 until her normal retirement age of 67 -- Lindsay will need to accumulate at least $750,000 and probably $1 million, based on the same tax and inflation projections.

To reach the target, Cheryl Hancock, of Rinehart & Associates, in Charlotte, N.C., advises Lindsay to "save as much as you can while you're making the big bucks." Starting with the $50,000 in the bank, Lindsay should add $27,000 this year, then boost her contribution by 3% each year. If she earns 8% a year on her nest egg and emphasizes tax-efficient investments, she'll approach $1 million. A menu of low-cost index funds or exchange-traded funds, most focusing on stocks, should do the trick. A similar plan for her retirement accounts should ensure a comfortable lifestyle when Lindsay calls it quits altogether.