What's the Magic Number?

Four in 10 Americans plan to retire early, according to a survey by the Employee Benefit Research Institute (EBRI).

And no wonder: What could be the downside of perfecting your tennis game, writing the great American novel and otherwise doing all the things you'd be doing right now if only you weren't working?

"Age 65 has become irrelevant," says Jon Miller, CSP, CISP, Vice President of Personal Financial Services at Northern Trust. "Today's workers are defining retirement themselves instead of letting the workplace or government define it for them.

"But the problem with early retirement is that your company stops paying your salary. And that leads to the question: 'Can I afford the lifestyle I want when I have fewer years to invest for retirement and more years to spend in retirement?'"

Funding a 30-year vacation
Determined to be free at 50? Answer these six questions before taking the plunge:

1. Are you ready for the long haul?
The good news about early retirement is that we're living longer. That means more years for a healthy, active retirement: snorkeling with the stingrays maybe, or taking a few strokes off your golf game.

The bad news about early retirement is that we're living longer. At age 50, according to the longevity charts, you still have about 30 years to live. Which means that if you retire early, you may need to fund a retirement that stretches 20, 30, 40 years or more.

2. Can your money outpace inflation?
That $120,000-a-year that looks like a fortune today will be worth $60,000 in buying power 20 years from now. Are your investments set up so you can afford the lifestyle you want - or the mortgage, for that matter - as inflation takes its bite out of your retirement income?

3. How will you fill the insurance gap?
Retire at 65, and Medicare kicks in to replace your company-funded insurance. Retire at 55, and you have ten years when neither Uncle Sam nor Father Employer will pick up the bill. That means you need to be ready to pay for health care insurance during the first years of early retirement.

4. Are you set up to subsidize Social Security?
Social Security is the largest source of income for current retirees, comprising 42 percent of their annual incomes, according to the EBRI. Retire early, and you won't get benefits until you turn 62 - and then only 80 percent of what you'd receive if you'd waited until your full retirement age. And that's if you're counting on getting anything at all.

5. What's your pension situation?
Chances are, your dad retired with a nice pension to go with his gold watch. You, on the other hand, are more likely to have worked around, building an impressive resume but a paltry pension.

Pension plans are the second largest source of income for current retirees, making up 23 percent of their retirement earnings, according to the EBRI. If you can't count on a hefty pension, your portfolio will have to make up the difference.

Three early-retirement solutions
Still want to wave work good-bye before 65? These three strategies will help:

1. Return to work.
One-third of retirees now go back to work, according to a study by Mark Hayward, a sociologist at Pennsylvania State University. Many return because they miss the structure and social life of a job. Others do it for the money. For some, "early retirement" really means getting a shot at a dream career - the freedom of self-employment, maybe, or the pleasure of teaching sailing.

2. Reduce your great expectations.
Grandma might have spent her later years keeping up with "General Hospital." But you, you're going to hike the shoreline of England, practice your downhill ski moves in Gstaad and replant the rain forest in Brazil. "Retirement often comes down to a question of quantity or quality," Miller says. "Sometimes you can afford either an earlier retirement or a better one." Another option: Scale back your lifestyle now so you can invest in a longer - and better - retirement later.

3. Invest for the long haul.
Grandpa probably shifted his portfolio from equities to bonds long before calling it a career. But then, in Grandpa's day, most 65- to 69-year-old men were still employed, according to American Demographics. And back then, the average life expectancy was 66. So retirement might have lasted a couple of years - or a couple of days. You, on the other hand, are going to live forever (or at least until you're 76.5, according to the statistics). So you need to invest for the long haul, even during retirement.

"Investment planning is complex, and formulas can't replace customized advice from a financial planner about your personal situation," Miller says. "But there are ways to begin thinking about retirement investing.

What's the magic number?
These days, the standard retirement age remains 65. But the median age has dropped to 63. And 27 percent of American workers plan to retire at or before age 60, according to the EBRI.

So what's the magic number for you? Given the proper financial planning: any time you choose.

Making it last
"Invest your age" to fund a long retirement.

Early retirement, increasing longevity and inflation can equal a portfolio straining to last as long as you do. The invest-your-age formula can help you overcome that problem by keeping more of your money in equities longer. To use the invest-your-age formula:

• Take your age as a percentage of
  your portfolio.
• Put that amount into bonds and cash.
• Invest the rest in equities.

Most financial planners actually use an invest-your-age-plus-or-minus-10 formula, which means that when you're 60, you'll want to have 50 percent to 70 percent of your assets in bonds.

"When might you move all your money out of equities?" asks Jon Miller, CSP, CISP, Vice President of Personal Financial Services at Northern Trust. "At your 90th birthday party, you might consider it."

Want more Information?
For help planning your asset allocation strategy, contact your Relationship Manager or call the Northern Funds Center at 800/595-9111.