Q. I would like to get some information about what else I should be doing in terms of savings. My wife and I have a goal of retirement by age 50.

I am 28 and my wife is 32. I have a 401k that has already grown to a little over $70,000. I have been fortunate that I made quite a bit of money right out of school and that my company matches dollar for dollar on the first 5 percent. Currently my income ranges from $80,000 to $110,000 (I am in sales). My wife has accumulated $50,000 in her 401k and earns a salary of $72,500. We are both contributing the maximum amount.

While our 401k money is doing quite well, it can't be touched until we are almost 60. So we have a long way to go before that ever hits our pockets. My wife feels we should be saving even more money each month.

Will our 401k plans, with ongoing contributions and growth earn enough for us to live a very comfortable life? What else could we be doing in regards to savings that will help us reach our goal of early retirement by age 50?

---M.E., by e-mail


A. It is possible to make withdrawals before age 59  ½ without penalty. To do it you must make a series of "essentially equal" withdrawals for at least 5 years or until you are 59  ½. Many early retirees do this.

Instead of dealing in dollar figures, which tend to become large and incomprehensible, let's talk about retirement in terms of years of living and years of income. The first thing you need to know is that retiring at age 50 is a very ambitious goal. It means that you want to accumulate enough money in a 25-year working period to sustain you through the remainder of your life, about 35 years.

The next thing to consider is that a long retirement requires that you act as though you were going to live forever. That is, you need to have a modest withdrawal rate from your nest egg because it has to survive a long time. As a practical matter a 5 percent withdrawal rate is about tops. That means you need to have a nest egg that is 20 times your annual spending, including income taxes. That can be a very large number.

The good news here is that our equation (nest egg divided by spending equals 20) has a numerator and a divisor. Reduce your spending, the divisor, and you won't need as large a nest egg. At an income of $150,000 to $180,000 you and your wife are at about 3 times the income level of the median two earner couple in America.

That gives you a lot of room in your spending decisions. Spend up to your income and you'll need about $3 million to retire, plus any adjustment for inflation. Spend below your income, and you'll need a lot less. A spreadsheet I use can give you a very rough idea of the leverage in your spending decisions. At your current rate of saving, you can retire at 40 percent of your current income in 17 years; at 50 percent of current income it will take 20 years; at 60 percent, 22 years; at 70 percent, 24 years; at 80 percent, 26 years. All this assumes that income, income to be replaced, and inflation all rise at 3 percent and that your investments return 10 percent.

Bottom line: you're on path to your goal. Just remember, 20 years is a long time and everything changes.


Q. I am 29, single, and rent a townhouse. My annual income is about $75,000. I have about $800 in credit card debt, a $581 car payment, and school loans totaling $34,000. I put 9 percent into my 401k, which my company matches $0.75 for every $1.00 up to 6 percent. I also have a TD Waterhouse account of $3,000. Question: what can I do now that will give me the best opportunity to be "comfortable" when I retire? Invest more in my 401K? Buy more stocks? Mutual funds? Annuities? A house?

---J.M., Dallas, TX


A. Your current 401k contribution takes you out of the 31 percent tax bracket and into the 28 percent bracket. That's nice--- but 28 percent is still a stiff tax and a nice "co-contribution" from the federal government if you increase your contribution rate. That's the first and easiest thing to do. The next step would be to start a Roth IRA, paying current taxes in exchange for tax-free future withdrawals.

Buying a house may not work. If the monthly cost of supporting the house is materially greater than your monthly rent plus utilities, you have to consider that the benefits of home appreciation are uncertain while the increased monthly expenses are certain. In addition, the house you buy as a 29 year old single person will probably be very different from what you would buy as a married person.