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Retirement: Why your 'number' doesn't matter

Everyone fixates on that big savings target, but there's a better way to plan for retirement.

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By Walter Updegrave, Money Magazine senior editor

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(Money Magazine) -- Back in the '60s, when the musical "Hair" was heralding the dawning of the Age of Aquarius, the popular catchphrase was "What's your sign, man?" But with Hair now a nostalgic memory (in my case literally) and boomers more concerned about retirement than about Jupiter aligning with Mars, the new mantra is "What's your number?"

Indeed, the phrase has become such a part of the national psyche that financial services firm ING has made it the basis for a clever ad campaign showing people going about their everyday business while carting around a bright orange six- or seven-figure sum that represents how much money they need to retire.

As much as I believe that it's good to have goals, I don't think you should get too hung up on any one number. For starters, it can be pretty discouraging to find out that your number is $2 million if you've got a hundred grand in your 401(k).

And with so many variables in retirement planning, it's unrealistic to think that a single number can truly reflect how much you'll need in 10 or 20 years. Even if you could make such a projection accurately, your number can change significantly if you alter a few assumptions, as you can see in the box below. Rather than fixating on one number, I suggest taking this three-step approach.

Think income, not a lump sum

What you really want to know isn't how large your nest egg should be - it's hard to translate a big number into a lifestyle. It's the odds that all your resources will be able to generate a reliable income.

For this you'll need to use an online calculator - or hire an adviser. I like the my Plan Retirement Quick Check calculator in the Retirement and Guidance section of Fidelity's website (fidelity.com; registration is required). Plug in such information as your current savings, how your money is invested, Social Security payments and any pensions, and you'll get an estimate of your chances of producing different levels of retirement income depending on how well the markets do. The nice thing about this approach is that it tells you where you stand with a number you can relate to.

Build in a safety margin

No matter how rigorous an analysis you do, you may still end up needing more cash in retirement. One likely reason is higher-than-anticipated health-care costs. A March study by Barclays Global Investors contends that with Medicare's long-term expenses outpacing its revenue to the tune of $70 trillion, the program simply isn't sustainable. As a result, Barclays estimates that future middle- and upper-income retirees could face medical and insurance costs that would effectively reduce their income by as much as 20%.

Who knows, maybe Congress will come up with a less painful way to solve this problem. But just in case, you should consider saving more to build a cushion to help absorb retirement shocks.

Give yourself regular checkups

The road to retirement can have many detours: a layoff, a market downturn. So every year, check in to see whether you're still on track and, if not, fine-tune your plan by saving more or tweaking your investment strategy. By making adjustments early, you'll have a better shot at retiring in the style you envision.

Next time someone asks you what your number is, tell them you don't know and don't particularly care - but that you are improving your chances of retiring comfortably, whatever the price tag may be.

Your big number? It's a moving target

Consider how much your number, the total sum you need to retire, varies as your plans change - you work longer, say, or need more of your pre-retirement income than expected.

Sign up for Updegrave's weekly e-mail newsletter at cnnmoney.com/expert. You can e-mail him at longview@moneymail.com. To top of page

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