Are you retiring early? Start saving now


New York -- Memo to workers who retired early or are planning to: You probably won't make it financially unless you find a part-time job. At 55, you could easily live for another 30 or 40 years. If you're not working, you'll need more savings than most people ever see in a lifetime.

The number of early retirees is huge. In 1970, 83 percent of the men 55 to 64 were still in the labor force. By 1980, that had dropped to 72 percent, and it's 67 percent today. Growing numbers of younger men are also on the beach, thanks to the mass defenestration of middle management. Women's labor-force participation rate, which is about 45 percent, hasn't declined, probably because women haven't built retirement benefits as large as men's.

The early retiree's silent enemy is inflation.

If you retire on $30,000, you'll need $44,000 10 years later to pay exactly the same bills, assuming that expenses rise 4 percent annually. In 25 years, you'll need $80,000. A quarter of that money might come from Social Security, which rises with inflation. But the value of most pensions declines. If you don't have a paycheck coming in, you'll need more from your savings every year.

Here's how to estimate the cost of financing 35 years of leisure in a world of 4 percent inflation:

(1) Add up how much money you'll need in the year you retire.

(2) Reduce that by your income from pension and Social Security. The remaining money has to come from savings.

(3) For every $10,000 you'll need from savings, your kitty should contain $198,000 if it's yielding an average of 8 percent annually, says planner John Allen of Allen-Warren in Arvada, Colo. If your money earns only 6 percent, you'll need $258,000 for every $10,000 you'll draw. This assumes that you'll gradually use up your capital over your lifetime.

If you haven't saved that kind of money, you cannot truly retire early. You'll have to keep your hand in the job market (or your spouse will) to avoid surrendering your standard of living. Here are some other ways of making your money last:

* Plan on slashing your budget, especially if you'll still be repaying your children's college loans. You can live on less by moving to a cheaper part of the country.

* Don't sell your home and rent. You're too young, and the future is too uncertain. If you have two cars and you're both retired, sell one of them.

* Wait as long as you can before dipping into tax-deferred retirement savings, says planner Jane King of Fairfield Financial Advisors in Wellesley, Mass. Leave these funds in your former company's plan if it offers you good investment choices. If not, roll the money into an Individual Retirement Account.

* Don't cling to your former company's stock just because you feel loyal. It's risky to have too much money invested in one place. Another investment to avoid: limited partnerships (now called "direct investments"). They tie up your money and may not deliver the promised income.

* Planners disagree on whether you should pay off your mortgage. In one corner, Judith Lau of Lau & Associates, Wilmington, Del.: "Paying up an 8 percent mortgage means you're getting a nice 8 percent return," she says. "To preserve your access to that cash, open up a home-equity line you can borrow from." In the other corner, John Sestina, Columbus, Ohio.: "Paying off the mortgage is a bad move. The value of compounding your cash in various types of mutual funds will exceed the cost of the loan," he says.

* Open up a home-equity line of credit before you retire. Some banks lend only on earnings, not on retirement income.

* To make your savings stretch, up to half of your savings should to be invested for growth. Over most five-year and 10-year periods, stocks outdo bonds by comfortable margins. Yet retirees as well as pre-retirees tend to shy away.

With U.S. stock prices coming off record highs, this is no moment to drop your nest egg into the U.S. market.

But funds that buy European and Asian stocks look good. Too many investors waste time mourning the opportunities they may have missed in the 1980s. Says Allen, "Worry instead about all the opportunities that you may be losing now."

Washington Post Writers Group

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