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2 More Years for a Better Retirement

http://www.fool.com/personal-finance/retirement/2008/01/10/2-more-years-for-a-better-retirement.aspx

Selena Maranjian
January 10, 2008

When I've written before about our collective need to save more for retirement, I've often cited my favorite retirement resource: our Rule Your Retirement newsletter service. In its pages, Robert Brokamp has explained that in order to make your nest egg last, you should conservatively plan to withdraw about 4% of it per year in retirement for living expenses. If you end up with a $1 million nest egg upon retirement, you'd withdraw $40,000 in the first year to live on.

That might sound not so bad, but many of us can't count on that $1 million yet. If you've got only $150,000 socked away, and you're eight years from retirement, you'll have to earn an annual average of 27% on your money to hit a million in time. That's nowhere near a reasonable amount to expect. Even the market's historical average annual gain of around 10% is far from a sure thing. Over the coming eight years, you might well average 12% -- or 7%. Yikes.

A modest proposal
Are you stuck, then? Not necessarily -- there are always things you can do to improve your position. For starters, note that my example above begins with a static $150,000 and adds nothing. Over your coming eight years, you can always keep adding to your nest egg.

Better still, consider this suggestion: Work a little longer. Not a decade longer (unless you really love your work and can't think of anything else to do), but just a few more years. Remember how, with my initial example, you'd need to earn an annual average of 27%? Well, if you stretch your retirement to 10 years in the future, instead of eight, you'd need to grow your nest egg by just 21% annually. Make it 12 years away and you'd need to earn around 17.5%. That's still too much to expect automatically, but it's a lot more reasonable.

In The Baltimore Sun, columnist Eileen Ambrose tackled this topic:

[B]y staying on the job two or so years longer, workers delay cracking open nest eggs. They can continue sticking more money into a 401(k) and receiving an employer match. They won't have to tap Social Security benefits early (meaning they'll end up with higher Social Security payments when they start receiving it). And they'll have fewer years of retirement to finance. Additionally, they can remain on an employer's insurance plan instead of having to pay this large expense out of pocket until Medicare kicks in at 65. It also gives them more time to pay down debt, which can be a substantial drag in retirement.

See? It's win-win -- unless your job makes you want to poke needles in your eyes.

Running the numbers
A look at some scenarios might help you appreciate this strategy more. The table below shows the effects of 10% annual growth on different amounts of money over different spans of time.

Nest Egg

Years

Result

$100,000

25

$1.1 million

$100,000

27

$1.3 million

$200,000

20

$1.3 million

$200,000

22

$1.6 million

$200,000

27

$2.6 million

$300,000

13

$1.0 million

$300,000

15

$1.3 million

$300,000

18

$1.7 million

See the power of just two or three more years? By waiting an additional seven years, you can double your nest egg's size simply by earning the market's historical 10% average annual return. You might even earn more than 10% by investing in some top-notch mutual funds, or by selecting some solid, growing companies. The list below shows you the returns, on an average annual basis, of several fairly well-known companies over roughly the past 20 years.

  • Boeing (NYSE: BA  ) : 14%
  • Johnson & Johnson: 17%
  • Walgreen (NYSE: WAG  ) : 17%
  • Disney (NYSE: DIS  ) : 10%
  • Texas Instruments: 14%
  • General Electric: 15%

Meanwhile, impressive mutual fund Calamos Growth (CVGRX) has grown by almost 18% annually, on average, over the past decade (including a strong performance