Why retire rich?
I can't really identify with an affluent post-retirement lifestyle. So how much should I save to have a middle-class lifestyle in retirement?
By Walter Updegrave, MONEY Magazine senior editor

NEW YORK (CNNMoney.com) - I recently saw an article about the cost of maintaining an affluent lifestyle in retirement in different regions of the country. I can't identify with such high living, however. So can you tell me how much I have to save in order to have an upper-middle-class lifestyle in retirement?

-- Patrick Leonard, Olathe, Kansas

You've got to be careful about labels like "affluent," "middle class" and "upper middle class" to describe someone's finances or lifestyle. After all, I know people who live in homes worth close to a million bucks, own a big SUV or two, take several vacations a year, but they'd recoil in horror if you suggested that they were "affluent" or "rich." They consider themselves upper-middle-class at most.

So when you want to do some serious planning about your retirement, you're much better off avoiding imprecise concepts and focusing instead on some hard numbers.

And the number you want to focus on in this case is how much annual income do I need to live the type of life I want to lead in retirement?

The price of the lifestyle

Granted, it's no cinch to come up with a figure that's accurate down to the penny (or dollar, for that matter), especially if retirement is many years away. But it is possible to come up with reasonable estimates that can help you plan for retirement and assess whether you're on track.

If you're more than 10 years away from calling it a career, your best bet is to set a retirement income target as a percentage of your estimated pre-retirement income. The percentage that's typically suggested falls in a range of 70 to 90 percent, but I usually recommend shooting for the higher end of that range, 90 percent or even more if you want to more assurance of having enough dough when you retire. So, if your pre-retirement income is, say, $60,000, you might set a retirement income target of $50,000 to $60,000 a year.

Now, this approach assumes that the lifestyle you'll live in retirement will be about the same as your lifestyle just before you retire. Which makes sense. After all, I doubt that many of us plan on living comfortably during our working lives and then scaling back to a grim existence once we retire.

Nor do I think many people are counting on a huge jump in their standard of living (at least in the financial sense) after they retire. I mean, it would be unrealistic for someone who spent his career as a midlevel corporate executive to expect to live out retirement in the style of a CEO, with lavish travel, houses spread around the globe and the like.

Running the numbers

There are plenty of calculators that can only help you figure out how much you must save to reach that future income goal, but also show you how much different moves (saving more, investing differently, postponing retirement a year or two) can increase the odds of meeting your goal.

Two that jump to mind are our very own Retirement Planner and the Financial Engines service. Many large investment firms and most good financial planners should also have software that can do the same thing.

Once you're within 10 or so years of retirement, however, I'd recommend doing away with the percentage-of-income estimates and instead try to estimate the actual expenses you'll incur in retirement. The exercise will be helpful because it will force you to think more about what sort of retirement you want to lead (and what you can realistically afford).

You can make a budget on your own or with the help of an adviser. Or you can turn to the Web for help. For example, you can download a free interactive "post-retirement budget" worksheet by clicking on the Free Programs link at the Analyze Now! site. Fidelity's Retirement Income Planner service also has a very detailed online budgeting worksheet, although it's available only to Fido customers.

How many real dollars do you need to save?

And that brings us back to a slightly different version of your original question -- namely, once you know how much income you'll need in retirement, how large a pot of assets do you need to generate that income?

The answer can vary depending on a number of factors, but, generally, if you want to be sure your nest egg will last at least 30 years, you should draw no more than 4 to 5 percent of your portfolio's value the first year of retirement, and then increase that amount for inflation each year to maintain your purchasing power. (For more on setting a reasonable withdrawal rate, click here.

If you follow that guideline, then you'll need $20 to $25 in assets for every dollar you want to spend. So, if you figure you'll want $60,000 a year to live comfortably in retirement, and you'll get $15,000 from Social Security, you would need $50,000 in investment income, meaning your retirement nest egg should total $1 million to $1.25 million.

Now whether you consider a $60,000 retirement income middle class, upper-middle-class, affluent or something else, well, I don't think it really matters. What's most important is that you figure out how much you will need to live a comfortable and fulfilling retirement, and that you start saving as early as possible to reach that goal.


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