How can I keep my standard of living throughout my retirement?

@Money December 22, 2011: 5:21 AM ET

NEW YORK (CNNMoney) -- How much should I have in a 401(k) or other retirement accounts at various ages relative to my salary so I know I'll eventually enough money to maintain my standard of living throughout retirement? -- K.T., Olathe, Kansas

When I was growing up in Philadelphia, my family would take trips to Wildwood, N.J., in the summer. Along the way, we'd stop for breakfast at Olga's Diner on the Marlton circle (both the diner and the circle are now gone).

As a kid, I had no idea of how to get from Philly to the Jersey shore. But that annual stop was an indication to me that we were on the right route to our summer vacation.

Essentially, you're asking for the same thing: a benchmark or milestone -- the financial equivalent of an Olga's diner -- that will tell you whether you're on the right path to a comfortable and secure retirement.

There are several ways for you to gauge that. One is the metric you suggest --that is, determining whether, given your age and how much you earn, you have enough salted away to give you a decent shot at being able to retire without having to ratchet down your lifestyle.

And, indeed, a few years ago a financial adviser I've known for years, Charles Farrell of Northstar Investment Advisors, wrote a book titled "Your Money Ratios: 8 Simple Tools for Financial Security" that does just that. It lays out at various ages -- 25, 35, 45, etc. -- the multiple of salary you should have tucked away in order to retire at a reasonable standard of living.

So, for example, if you would like to retire at 65 on 80% of your pre-retirement salary, you would want to have about 1.4 times your salary saved by age 35. Assuming a salary of $50,000, that would mean you should have about $70,000 tucked away by that age.

By age 45, you'd need to have a larger nest egg, about 3.7 times salary. Assuming your salary had grown from $50,000 to $65,000 by age 45, that would suggest you should have retirement accounts worth roughly $240,000 in order to be on track to replace 80% of your pre-retirement pay during retirement.

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Of course, if you were willing to live on less in retirement -- say, 70% of your pre-retirement income instead of 80% -- then you wouldn't need to have as much set aside at each age. You would need just 3.1 times pay, or just over $200,000, socked away by age 45 to retire on 70% of pre-retirement pay.

The same goes if you're willing to retire later. Someone 45 willing to work until age 70 instead of 65 would require 2.5 times salary, or a bit less than $163,000, to retire on 70% of pre-retirement income, assuming a $65,000 salary.

One of the nice things about this approach is that it's pretty simple. You can easily compare how much you have stashed away at a given age to what you should have. That allows you to quickly see whether you're ahead, behind or right about where you should be.

You need to keep in mind, though, that these very precise numbers rest upon a host of assumptions that may or may not pan out.

Starting young

Among those that Farrell makes are the percentage of salary you'll continue to save until retirement age (generally 10% to 15%, depending on your age and how much pre-retirement income you want to replace), the rate of return you'll earn on your retirement investments (4.5% annually after inflation), the percentage of pre-retirement income that Social Security will replace (20%) and the amount you'll pull from retirement savings to generate the income Social Security won't provide (a 5% initial withdrawal subsequently adjusted for inflation).

Clearly, you could argue with any or all of these assumptions. But overall I think they're reasonable given the uncertainty inherent in the financial markets and the long time horizon required for retirement planning. Whether you agree with them or not, however, they're baked in. You can't create alternate scenarios by changing one or more of them, say, assuming a different savings rate or investment return.

Which is why you might also want to consider some tools for tracking your retirement progress that use the same principles but get at the projections in a different way.

For example, our What You Need To Save calculator won't tell you how much you should already have saved at any given time. But if you plug in your age, salary and the value of your current savings, it will tell you the percentage of salary you should be saving in order to retire at 65 on 80% of pay (after deducting annual savings).

Super young retirement savers

As with Farrell's money ratios, there are numerous assumptions built into this calculator that you can't change. But based on how high or low that rate is, you can not only get a good sense of whether you're on track, but what you need to do to improve if you've fallen behind.

You can get an even more nuanced view of where you stand vis a vis retirement by going to a tool such as T. Rowe Price's Retirement Income Calculator.

Although the underlying assumptions about market returns and withdrawal rates in retirement are hard-wired, you are able to change a bunch of other factors, ranging from the age you'd like to retire, how you allocate your assets between stocks and bonds both prior to and during retirement and the percentage of pre-retirement salary you'd like to shoot for. You can even plug in income from a pension or a part-time job.

Fix your asset allocation

But what really differentiates this calculator from the two approaches above is that it couches its results in terms of probabilities. Instead of saying you will or won't be able to retire on a certain percentage of salary at a certain age if you continue on your current path, it gives you the percentage chance of reaching your goal -- 30%, 60%, 80%, or whatever.

Of course, those percentages aren't guaranteed. No calculator, no matter how robust, can foretell the future. But the higher your chances, the more confidence you can have that your planning is solid. And if the probabilities the calculator spits out are uncomfortably low, that's a sign you better start doing something different. And, indeed, you can test different strategies -- retiring later, saving more, etc. -- to see how much they boost your chance of success.

Finally, when it comes to retirement planning, remember that you've got to check in periodically to monitor your progress. Even if it seems you're on the right path now, a layoff or a big market decline or an unexpected health problem could throw a hurdle onto your path.

So every year or so revisit whichever metric or method you use and, if you find you're backsliding, make necessary adjustments. Doing some fine-tuning and tweaking along the way will reduce the chance that you'll have to make wrenching adjustments right before (or even worse, during) retirement. To top of page

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