Mellody Hobson's Q&A on Saving for Retirement

March 6, 2007 — -- For baby boomers, retiring can be both a blessing and a curse. While the idea of not working can sound sublime, it also means that financial preparations should have been made years in advance. But according to "Good Morning America" financial contributor Mellody Hobson, with a little planning and a lot of saving, you can live a financially secure life in your golden years.

Q: Is there a magic number or formula we can use for calculating how much we will need in retirement?

Unfortunately, there is not a silver bullet for retirement. Everyone's formula depends on a number of factors, such as current age, intended retirement age, life expectancy, risk tolerance, inflation and most of all, health.

Generally, the savings target for retirees should be between 80 to 90 percent of your preretirement income. Statistics show that a healthy retirement savings nest is one which your annual withdrawal is 6 percent or less.

Q: Eighty or 90 percent sounds like a lot. What does that mean in real dollars a month?

Again, this depends on your current income and lifestyle you desire in retirement. For example, if you make about $50,000 a year, you would need to have roughly $840,000 saved for retirement to maintain a similar standard of living.

Depending on the number of years you have until retirement, how you get to this $840,000 can vary dramatically. For example, if you have 35 years left until you retire, you would need to save about $400 a month -- assuming an annual rate of return of 8 percent.

If you have 25 years remaining, you would need about $958 a month and if you have only 10 years remaining you would have to put away roughly $4,800 a month.

Q: What about those of us who haven't saved as much as we should and are getting close to that 10 year number. What can we do?

It is a pretty daunting statistic: According to the Employee Benefits Research Institute, by 2030, the annual shortfall between the amount retirees need and the amount they will actually have will be at least $45 billion. The fact is, 50 percent of workers do not have any retirement savings.

First and foremost, make a commitment to decrease your spending and increase your savings. Even an incremental up-tick in savings can make a significant impact over the long term. For example, if you currently save $3,000 a year, over the course of 15 years, you would have saved about $88,000, assuming average annual returns of 8 percent.

However, if you increase that amount by 10 percent to $3,300 (an extra 25 dollars a month) annually, you would have almost $97,000 after 15 years -- a difference of almost $9,000!

Moreover, for baby boomers nearing retirement age, they you should do their best to maximize contributions to their 401(k) and IRA and try to take advantage of catch-up provisions. Specifically, in 2007, individuals age 50 and older may contribute an additional $1,000 to their IRA for a maximum annual contribution of $5,000.

The catch-up provision for a 401(k) is even more meaningful. You can defer an additional $5,500 in catch-up contributions for a maximum annual contribution of $20,500. Between your 401(k) and IRA, these catch-up provisions can make a big difference in the long-run.

Q: Nobody likes to hear it, but you say for many of us, the best way to ensure our retirement is to keep on working. Explain.

Yes, the reality for millions of Americans is that retirement may have to wait. The average life expectancy for a baby boomer is 83 years of age -- a span of more than 20 years for workers who decide to hang it up at 62.

According to a survey conducted by Kansas State University, almost 80 percent of baby boomers expect to continue to work after they retire. Not only will working longer allow your personal retirement savings to build, but the amount you receive in Social Security will also increase.

The normal retirement age for baby boomers is either 66 or 67, depending on the year they were born. Currently, the average worker retires at approximately 62 years of age, which is the earliest age at which you can begin collecting Social Security.

However, if you wait to receive benefits until your normal retirement age, your benefits will be significantly higher and will continue to rise until either you start receiving benefits or reach age 70.

Q: What about paying for the costs of college for children? How should couples set priorities?

It is critically important for you to save for your own retirement before saving for your children's higher education. While there are a multitude of scholarships and loans available for college students, there are no scholarships for retirement. Your children will have their whole careers ahead of them to pay off loans, whereas you may putting yourself at financial risk if you delay saving for your own retirement.

Mellody Hobson, president of Ariel Capital Management in Chicago (www.arielmutualfunds.com) is "Good Morning America's" personal finance expert.