Got enough to retire? Think again

If you've enjoyed a prosperous working life, don't count on finding big savings once it ends.

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By Walter Updegrave, Money Magazine senior editor

(Money Magazine) -- It's one of the most widely accepted benchmarks in retirement planning: You'll need just 70% to 80% of your pre-retirement income to maintain the same standard of living when you leave work behind.

This rule of thumb can be traced to the replacement-ratio studies done for 20 years by Aon Consulting and Georgia State University. The idea is that since you'll no longer have to plow money into 401(k)s and other accounts and your expenses and taxes are likely to drop, you'll be able to live well on less.

But the latest study by Aon shows that you shouldn't be too quick to rely on this yardstick.

As you can see in the chart at right, you'll need to replace far more of your pre-retirement income if you made the big bucks during your career.

That's largely because your tax bill won't go down as much as you'd expect, in part because up to 85% of Social Security payments are taxable at higher incomes. Notice too that for high earners, Social Security kicks in less.

And finally, let's not forget that these ratios represent average spending. Your actual budget will depend on everything from whether or not you retire with a mortgage to how you want to spend your days.

So how can you settle on a retirement income target that will give you a reasonable shot at achieving the lifestyle you envision? Here are three suggestions.

Aim a little high

If anything, we have a tendency to underestimate how much money we'll need in retirement. When the Employee Benefit Research Institute queried workers and retirees earlier this year for its 2008 Retirement Confidence Survey, it found that while almost 60% of those still working said they expected to spend less in the first five years of retirement, more than half of retirees said they had actually spent the same or more.

Given the inherent uncertainty of predicting your spending, I think it's prudent to err on the conservative side. That way you'll be able to handle higher than expected health care expenses or energy spikes in stride. Whatever the average replacement rate is for your income, set your target five to 10 percentage points higher. If you're hoping to travel a lot or otherwise loosen the purse strings, you might take it up another five or 10 points.

Do a reality check

Once you have an income goal, go to our Retirement Planner to get a savings target. If you can handle that amount, great. But if you find that building a portfolio large enough for you to retire on, say, 90% of your current earnings requires you to save more than you can afford, lower your sights.

Just remember that if you set the savings bar too low, you may be relegating yourself to a meager retirement lifestyle. To avoid that possibility, go back to our tool periodically or visit a financial planner to see what sort of retirement income you're on track to generate. Then boost your savings rate as your income rises.

Create a retirement budget

Once you're within 10 years of retirement, stop planning on the basis of an estimate and do an actual budget. Ideally, you want to use budgeting software or an interactive online worksheet, such as the one included in Fidelity's Retirement Income Planner (available at fidelity.com; registration required).

You can't predict your future expenses down to the penny. But do as rigorous a job as possible, dividing your budget into essentials (food, shelter and such) that are largely fixed and discretionary items (travel, entertainment). Also consider whether you should build in a reserve for helping out aging parents or grandchildren.

Or you can ignore such nuances and just go with the 70% rule - and hope that a retirement based on the averages is the one you've always dreamed of.

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

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