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How Can I Make Sure I Have Enough Money To Retire?

Finance expert Jean Chatzky has the answer.

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Every Thursday this month, AARP Financial Ambassador Jean Chatzky is answering questions from Girlfriend readers.

Q. Hi Jean (and The Girlfriend!). I am a single, female marketing executive in my early 40s and I am looking towards setting myself up for retirement. My salary is too high for a Roth IRA and I have a solid six-figure nest egg of savings. Other than maxing out my 401(k) and employee match opportunities, what are some other ways I could make my earnings work harder for me now, so that I will be able to be financially independent when I retire in less-than 25 years? Thanks! — Meg

A. I get this question all the time and so I can tell you that one of the most frustrating things about it is that there is no one-size-fits-all answer. There’s a one-size-fits-most answer, and then there’s an answer that’s right for you. And I’m going to give you both.

One-size-fits-most: The good news, Meg, is that you’re on exactly the right track. We max out our opportunities for saving for retirement by putting money in tax-advantaged accounts like your 401(k) first. If you have a Health Savings Account (HSA) that you could also fund (it would be tied to a high deductible health insurance plan) it has very similar tax treatment and can — if not used for health expenses in real time — grow into a supplemental retirement account. Next, we look at accounts that may not give you a tax deduction for making a contribution, but where the money in the account grows tax-free or tax-deferred. A Roth IRA falls into that bucket, but so does a non-deductible IRA. With the latter, you’ll pay income taxes on the money upon withdrawal. Beyond that, in years that you can put away additional money, you want to do that in a plain old brokerage account where you can invest it to grow for your future. We do this even without the tax advantages because eventually life catches up and you’ll be glad, in hindsight, that you did.

How do you know if you’re on the right track? There are benchmarks developed by Fidelity Investments (which, full disclosure, sponsors my HerMoney podcast) that you can look to meet. By age 30, you want to have put away 1x your current income for retirement, by 40, 3x, by 50, 6x, by 60, 8x and by the time you retire, 10x. If you can manage to put away a consistent 15 percent of what you’re earning each year (including matching dollars) you should meet these benchmarks, which are designed to (when combined with Social Security) provide 85 percent of the pre-retirement income for a period of 30 years for people who earn between $50,000 and $300,000. If you’re not on track, don’t panic. Just start to bump up your savings rate by a few percentage points a year until you get there.

Right-for-you: There are people who will look at that replacement rate in income and think that they won’t need that much money (which may be true if you’re planning to have a paid off mortgage by retirement and think you’ll live a simpler life than you do now). There are people who will look at that replacement rate and think they’ll need more (which may also be true if you’ll still have a mortgage and are looking forward to traveling the world or other costly adventures).

Eventually, you’ll want to figure out how much it will cost you to live in retirement. You’ll want to put pencil to paper (or fingers to keyboard) and run the numbers on the life you and your spouse are envisioning. Start with what you spend now and adjust up or down based on how you plan to live later.

In general, research has shown adults in America spend the most in their 50s. That makes sense as it’s when the kids are likely starting college and those costs are piling up. But after that, as they leave home and eventually become self-sufficient, spending typically tapers off until we hit our 80s and healthcare costs ratchet things back up again. Research, again from Fidelity, forecasts that an average 65-year-old couple will shell out around $280,000 just for unreimbursed healthcare in retirement. That sounds like a lot, but it works out to about $5,000 per person per year and includes Medicare premiums. Just note: One cost you won’t have to replace is your saving rate. If you’ve made a habit of saving strong during your working life, that’s a line item you’ll enjoy being freed from down the road.