How much do you really need to retire?

If you think you're too young to start planning for retirement - think again - starting early can eliminate troublesome financial woes.

Many people dream of retirement in terms of languid days spent gloriously on green courses, sandy white beaches or golden summer resorts. But the reality is that because of poor planning or no planing at all, most folks will barely be able to pay their bills when they retire.

Those who think pension and Social Security benefits will bail them out in their senior years are sadly mistaken. Together these funds will account for half of as retiree's financial needs. And even that amount is assuming a person has worked for the same company for nearly 20 years. Unfortunately, a growing number of employees are paying the price of reduced retirement income due to career-switching and corporate downsizing.

Most people also fail to take into account how inflation eats up their pension dollars. A pension benefit may be a fixed amount or it may increase with the cost of living. If an employee's pension is not adjusted for inflation - and most are not - a $20,000 pension today will only be worth $10,772 in 10 years, assuming a 6% annual inflation rate.

The best way to avoid a bare-bones retirement is to squirrel away as much money as possible. "Many people between the ages of 30 and 50 are concerned about their retirement years. They are also fundamental miscalculations in their planning," says John Gummere, chairman and CEO of Phoenix Mutual Life Insurance Co., pointing out the earlier a person begins to save, the better.

This is borne out by hard numbers. Someone age 30, for example, could sock away $3,000 a year at 8% and amass $367,000 by retirement, thanks to compound interest. But if that person waits 15 years to save - at age 45 - he or she would have to put away $12,500 a year to come up with the same amount.

Regrettably, a poll conducted by Princeton, N.J.-based Gallup Organization Inc. for Phoenix Mutual shows the typical baby boomer has accumulated only $25,000 in retirement savings plans and $10,000 in personal savings accounts. Respondents were 30 to 50 years old with annual household incomes of at least $30,000. A startling 25% of those polled had not started to save for retirement at all.

This is especially true of the 76.5 million baby boomers who are having a hard time getting into the savings mode after the giddy "I-can-have-it-all" '80s. Even baby busters - those in their 20s - are vulnerable. Waiting too late to save for retirement could set back their standard of living for the rest of their lives.

To compound the lack of savings problem, the typical American worker also has less disposable income these days. The average paycheck, adjusted for inflation, is no bigger today than it was more than 20 years ago. And the fact is that people who earns less are inclined to save less.

Unfortunately, some people who have extra money, don't always think it's necessary to save. "I know someone whose idea of financial planning is to get enough money out of the automatic teller machine to last the weekend," says Mary H. Frakes, editor in chief of Stages magazine, published quarterly by Fidelity Investments in Boston and targeted at firms with 401(k) and other defined contribution retirement plans. "This person makes $87,000 a year and has no family to support. He should be doing something smart with his money."

Still, others just find it difficult to plan ahead and deal with large numbers. For this reason, many financial advisers break down retirement figures in simple terms. Investment consultant Cheryl D. Broussard of Broussard & Douglas Inc., Oakland, Calif., gives seminars where she tells participants to think of putting just $3.25 a day in a cookie jar. "I then explain that if they do that every day and the money earns 8% interest, they will have more than 7,000 in five years. People are surprised that such a small amount of money grows so fast," she adds. "So, not only does saving early help, but a modest amount will do."

Getting A Jump On Retirement

Individuals and families who have steady savings habits have peace of mind when they look at their balances, knowing the Caribbean cruise and not the bread line awaits them at retirement.

"Nothing is certain in life, but without planning I won't have a chance to have a fulfilling retirement," says Thomas Givhan of Birmingham, Ala., a pharmaceutical salesman for Roche Biomedical Laboratories Inc.

Givhan, 47, contributes 16% of his income in a 401(k) plan. He and his wife, Jan, who owns a boutique, have a household income of around $100,000. The couple also has about $10,000 invested in Fidelity mutual funds, which are divided into three areas: fixed income, growth and income and aggressive growth stock funds.

"That money is going strictly towards our retirement since we've already taken care of our children's college needs," he says, referring to the $93 a month each that they put away for Tajmah, 4, and Tahira, 1, into a state-sponsored prepared education fund, which guarantees tuition payment when the girls are ready for college.

The couple also owns some property in the Los Angeles area in hopes that the real estate market will bounce back by the time they retire. "We are looking to raise $200,000 to $500,000 from our income and property for retirement," says Jan, 41.

Kathleen Lynn also has her eyes squarely fixed on retirement. "You can never start too soon, because the years roll by and it's here before you know it. With people living longer and longer, you can never have enough money put aside," says the 37-year-old mother of two children, Sam, 5. and Anna, 2.

A part-time newspaper editor, Lynn earns $25,000 a year and her husband, Ben Nathanson, 37, an engineer with IBM Corp., makes more than $50,000. The couple has about $30,000 in IRAs that hold stock mutual funds, including 20th Century Ultra, and Vanguard Index Funds. While Ben contributes $4,500 annually to a 401(k) plan invested in bonds, the couple is considering switching to equities. "We're young enough to face market ups and downs," says Lynn.

Living In Style In Retirement

Most experts agree a retiree will need about 60% to 80% of his or her final working income to live comfortably. The most recent government statistics show that Social Security replaces only 38% of pre-retirement income for the average worker. According to Fidelity Investments, the largest Social Security benefit awarded in 1991 for someone age 65 was an annual payout of $12,956.

Even that amount is in jeopardy, say experts who warn that by the time the last baby boomer hits age 65 in 2029, the ratio of workers to retirees will drop dramatically.

But "Social Security was never intended to provide 100% of retirement income," says Pierre Dunagan, account executive with Dean Witter Reynolds, Matteson, Ill. He says three questions to ask when structuring a retirement plan are: * Will I be able to retire when I want to? * Am I making adequate preparations for the retirement lifestyle I would like to enjoy? * Have I positioned my investments to meet long-term objectives?

Many working Americans, even wealthy ones, simply cannot answer yes to these questions. Several financial planners admit to having clients who earn $100,000 and up and have at least $1 million in assets. Yet, they cannot meet their retirement financial needs without increasing their savings.

Surveys by Hewitt Associates, a benefits consulting firm in Lincolnshire, Ill., show that only 49% of employees have a good grasp of their retirement benefits; whereas, 71% understand their other benefits. In addition to a dwindling work force having to pay for older Americans' benefits, the average worker also faces the possibility of his or her pension not being as large as it once was. The reason? Job-hopping is on the rise and layoffs are commonplace. This means that most employees will work for more companies, but have less of a vested pension when they reach age 65.

The Employee Benefit Research Institute (EBRI), Washington, D.C., reports that the median total family income for those age 65 and older was $15,657 in 1988 but that private pension income accounted for only $3,586 of that total amount.

Overall pension participation is falling although the number of retired persons is growing. The number of workers who participated in company pension plans was down from 49% in 1979 to 43% last year. On average, company pensions provide 17% of the income of people age 55 and older.

Employees who opted for early retirement have been further disappointed with the size of their pensions. At some companies, for instance, you will get only a quarter of the monthly distribution you would have received had you worked until age 65.

Given these factors, the core of your retirement portfolio will have to come from you. But it's not enough to start saving early, you must know how to spend your money, says Paul Richard, vice president and director of education for the National Center for Financial Education, San Diego.

"The more you spend, the less you're going to have to save. Everyday purchases are investments, too," says Richard, "which ultimately decide how much money is left over for retirement."

Building A Golden Nest Egg 

A variety of methods can help determine how much money one needs to survive life after salary. Here are five steps to retirement planning. * STEP 1: Pinpoint your retirement savings goal. If you expect your final working income to be $65,000, for instance, you'll need at least $45,500 (70%) in current dollars during your nonworking years. * STEP 2: Next, figure out the retirement income that you (and your spouse) will have in annual pension and Social Security benefits. Say that amount is $28,000. Of course, you must factor in how much you currently have in savings and investments and what that amount will grow to by the time you retire. For this example, add another $7,500 in other expected retirement income. * STEP 3: Now subtract your estimated income from your estimated retirement living expenses ($45,500 to $35,500). Thus, the income shortfall is $10,000 a year. This means that you would have to make up the difference with supplemental retirement savings.

However, some people who find their retirement income isn't enough to maintain a preferred standard of living may opt to take another job. but experts warn: If you're under age 70, the more you earn, the more you'll pay in Social Security taxes. * STEP 4: Once you have determined how much you need to save until retirement, identify a specific investment strategy. Normally, the closer you are to retirement, the more likely you are to be conservative and income-oriented. If you lose money, you will have less principal for living expenses and less time to get it back. The longer you have until retirement, the more aggressive you may want to be, because you have time to wait out fluctuating market cycles.

Even at age 50, you still have 15 years to work on your nest egg. Investors with 10 or more years until retirement should consider investments that offer long-term capital growth and pay dividends. So, someone between the ages of 35 and 55 might invest 10% in money-market funds, 40% in growth and income stock funds, 30% in capital appreciation funds and 20% in high-quality bonds or bond funds.

By age 60, you'll want to shift your allocations toward more income-producing investments. An ideal portfolio might be 50% of assets in money-market funds, 25% in high-quality bonds and 25% in stocks or stock funds. * STEP 5: No matter what strategy you use, diversify your retirement portfolio. A crucial part of retirement planning is choosing investments that match your objectives and financial circumstances.

A big mistake people make is to avoid stocks in their retirement mix. While most financial experts don't anticipate a spectacularly high return for the S&P index over the next decade, they suggest that investors, even retirees, must invest in stocks. Historically, stocks have outperformed other investments. Compared with a compounded annual rate of 4.8% for Treasury bonds over the past 40 years, stocks have averaged 12.5%. One of the simplest ways to set aside money for retirement is through employer-sponsored savings plans. Many companies are now moving away from traditional defined benefit pension plans and more toward defined contribution plans, which include 401(k) and profit-sharing plans.

Through automatic payroll deductions, a 401 (k) plan allows eligible employees to invest pretax dollars in stocks, bonds, mixed funds or insurance certificates. Typically, the company pays 50 cents for every dollar the employee contributes (or up to 6% of the employees earnings). The maximum employee contribution is $8,728.

What happens to your defined contribution plan if you leave or change jobs? When you receive your pension distribution (usually in a lump sum), you can roll it over into an Individual Retirement Account (IRA) or pension plan. You have 60 days to transfer the funds or else pay a 10% tax penalty.

Despite tax write-off limitations, IRAs are still viable savings vehicles. You can contribute a maximum of $2,000 annually ($4,000 per couple). If one spouse doesn't work, together a couple can put in a total of $2,250. The downside of an IRA or 401(k) is that you cannot withdraw the money before age 59 1/2 without incurring a penalty.

In addition to opening an IRA, self-employed individuals can set up Keogh plans (tax-deferred pension accounts) and invest annually up to 25% of earned income or $30,000, whichever is less. Another option is variable rate annuities, basically insurance products, which pay a steady stream of income over the investors' lifetime. There's no limit to the amount one can invest. But there is a minimum initial deposit, usually $5,000.

If you truly want to keep what you earn then it doesn't matter where you put your money as long as you act now. The sooner you establish a savings and investment plan, the better your chances are of avoiding a penurious retirement.