Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

Retirement: What's your magic number?

By Walter Updegrave, senior editor

(Money Magazine) -- Question: Everyone talks about 'the number,' but what does it tell you? -- ROBERT C., Los Gatos, Calif.

Answer: Ah, the number. Books have been written about it. ING has designed an entire ad campaign around it. And an assortment of online calculators will help you figure out yours -- that is, the savings you'll need to amass by the end of your career to generate enough income beyond Social Security and pensions to retire comfortably.

Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

But while the obsession with this figure is somewhat useful -- it is good, after all, to have a goal -- there are better ways to determine if you're making progress toward a secure retirement.

To arrive at the number, you estimate how much income you'll need to maintain your standard of living after you retire -- and how long that income must last. So the number for a 55-year-old who earns $150,000 a year, plans to retire at 65 on 80% of his salary, and wants that income to last until age 95 would be $3,136,687, according to ingyournumber.com.

A moving target

But for all the apparent precision, your number is really an estimate -- and a squishy one at that. Your actual target could be much lower if you pay off your mortgage before retiring and your expenses drop significantly. Or it could be higher if you plan to travel a lot in retirement or if you run up steep health care costs. Other factors that will skew your bogey: your investment gains, how long you live, when you retire, and whether you work part-time after retiring.

The further you are from retiring, the more unknowables you face and the bigger the grain of salt you must factor into any estimate. So while it's useful to monitor your progress, your main concern, especially early in your career, should really be saving all you can. As you get older, and as some variables come into sharper focus -- like your health, your intended retirement age, and your projected peak salary -- then it may become easier to settle on a realistic numerical goal.

A better alternative

But your question raises a larger issue: Does it make sense to shoot for a big lump sum? A huge six- or seven-digit target can be intimidating. Besides, many people have a hard time wrapping their minds around big numbers. Behavioral economists warn of "wealth illusion," or the tendency for people to overestimate the sustainable income a large pile of money can generate.

That's why many retirement experts believe, as I do, that you're better off focusing on how much income you'll need -- and whether you're on track to get it. Yes, that's an estimate too, but one you can more easily equate with a lifestyle.

Some 401(k) plans are already helping workers make this shift. Putnam has introduced a Lifetime Income Analysis Tool that allows participants to see how much annual income they're projected to get from their current 401(k) balances, future contributions, company matches, and Social Security -- and how tweaking their contribution rate, retirement age, and stock/bond mix could get them closer to their goal.

You can run similar figures using the Retirement Income Calculator at troweprice.com. While you may learn that you're a bit short of your income target, being a few thousand dollars off that will be less daunting than learning that you're a quarter million shy of your number.  To top of page

Overnight Avg Rate Latest Change Last Week
30 yr fixed3.83%3.81%
15 yr fixed2.88%2.89%
5/1 ARM3.09%2.99%
30 yr refi3.92%3.91%
15 yr refi2.97%2.99%
Rate data provided
by Bankrate.com
View rates in your area
Find personalized rates:
Index Last Change % Change
Dow 17,050.75 138.46 0.82%
Nasdaq 4,810.79 19.64 0.41%
S&P 500 2,013.43 17.60 0.88%
Treasuries 2.11 0.05 2.23%
Data as of 7:47pm ET
Company Price Change % Change
Bank of America Corp... 15.75 0.00 0.00%
EMC Corp 27.18 1.22 4.70%
Apple Inc 109.50 -1.28 -1.16%
Freeport-McMoRan Inc... 13.46 0.45 3.46%
General Electric Co 28.03 0.26 0.94%
Data as of 4:03pm ET


Judge denies request by Paul Smith's College to change its name in order to secure huge donation from philanthropist Joan Weill? More

The National Domestic Workers Alliance introduced a new initiative, Good Work Code, to set standards and protections for on-demand workers. More

The National Domestic Workers Alliance introduced a new initiative, Good Work Code, to set standards and protections for on-demand workers. More

Karim Abouelnaga turned down a job on Wall Street to address a problem that set him back as a low-income student: the summer slide. More

One of the largest pension funds in the country says it needs to cut benefits for 273,000 current and future retirees as soon as July. Otherwise, it won't be able to pay any benefits after 2025. More