Build the big sum you'll need

Shawn Larsen, 47, has spent his career as a seismologist. Now he's thinking about biking and backpacking. Here's how he's saving to reach his goals.

March 15, 2007

By Walter Updegrave, Money Magazine senior editor

NEW YORK (Money Magazine) -- To step off the corporate treadmill in your fifties or early sixties and maintain anything close to your standard of living, you must have a seriously big retirement kitty.

How serious? You'll likely need assets worth 10 to 16 times your salary by the time you leave your job. A 45-year-old making $120,000 who hopes to retire at age 60, say, should already have nearly $700,000 set aside.

You can get by with less if you'll have other sources of income. If that same 45-year-old has a typical old-fashioned check-a-month pension, for example, he might need only $432,000 in savings to be on track. If you expect to hold down a scaled-back job for your first decade of retirement, you can also get by with less.

Still, your target is a big number, and to reach it you'll have to save diligently, invest aggressively and keep taxes and expenses from eroding your returns.

One way to get there is through the kind of prodigious deferred consumption that Shawn Larsen, 47, practices. After spending nearly 16 years as a seismologist at Lawrence Livermore National Laboratory, Larsen, who is single, has decided he wants to call it quits when he hits 50 and becomes eligible for retiree health benefits. That will leave him free to focus on the outdoor activities he loves: biking, backpacking and orienteering (a sort of combination of running, rock climbing and map reading).

Now in the home stretch, he's saving more than half of his $180,000 salary. "Aside from my mortgage and property taxes, I don't have many large expenses," he says. "Most of my social life centers around outdoor activities that don't cost very much."

He figures that when he combines the money he'll save over the next three years with the $680,000 he already has in mutual funds (mostly low-cost index funds) and his $300,000 in retirement accounts, he'll have enough to supplement his $30,000-a-year pension and even afford occasional splurges, like his dream of climbing Mount Everest, which he figures could set him back $75,000.

Now, you don't literally need to live on half your paycheck like Larsen. But you will have to do without a good many things you could otherwise afford.

For maximum impact, look to cutting back on your biggest-ticket expenses.

Driving a $21,000 Honda Accord LX and replacing it every 10 years, for example, could save you $180,000 over 30 years compared with driving, say, a new $30,000 Acura.

The same for sending Junior to state college rather than a private one, forgoing Swiss family ski trips for sledding at the park, and eating out less often.

The point is, giving up the odd latte won't get you to early retirement. If you're not willing to save 20 percent to 25 percent of your income, you're probably not going to make it.

Next, you must embrace risk in your investments. In the 10 to 15 years before you retire, that means keeping 75 percent to 80 percent of your portfolio in stocks, even if that's hard to stick to when the market stumbles.

Letting a fund manager police those allocations in an aggressive target-date retirement fund - like those run by Vanguard and T. Rowe Price - is one easy way to stay on course.

You should also periodically track your progress. And take full advantage of retirement plans like IRAs and 401(k)s, which come subsidized both by Uncle Sam's tax breaks and - in the case of most 401(k)s - by matching contributions from your employer.

If you really have a stomach for risk and hard work, open a business. Granted, this is a weightier decision than which mutual fund to buy for your 401(k): Most small businesses fail within five years.

On the other hand, successful businesses can build wealth faster than the S&P 500 ever could.

It's the route Stephen Chen, a 37-year-old entrepreneur who lives in the San Francisco Bay area with his wife, Connellan Coxwell, 37, and their two children, has taken. Chen owns a consulting business and runs, a Web site that helps people make the transition from work to retirement.

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