Ditch 'The Number' and find a realistic retirement savings goal

The retirement checklist
The retirement checklist

My wife and I would like to know how large a nest egg we need to retire. I understand there's no magic number, but what do you think is a good number to shoot for? -- Scott R.

You'd never know it for all the attention "The Number" gets in retirement planning. But the fact is that the road to retirement has far too many twists and turns to pin down your savings effort to any single number -- magic or otherwise.

But that doesn't mean you shouldn't have some sort of target to help you get and stay on track toward a secure retirement. Research shows that people who have a goal are more than twice as likely to feel confident about accumulating the savings they'll need.

But I don't think that goal should be a single figure. One reason is that the very specific numbers that some calculators and retirement planning software programs spit out create a false sense of precision. Can you really know at 45 that you'll need $1,596,743 to retire? Of course not.

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Change a few simple assumptions -- how much you'll earn, how long you'll live, what your retirement expenses will be -- and the amount can change by tens or even hundreds of thousands of dollars.

Even if the number happens to be accurate, a big six- or seven-digit figure can seem overwhelming. Faced with the prospect of having to build a $1 million to $2 million nest egg, I can imagine many people feeling there's no sense in even trying to shoot for so daunting a goal.

A savings target pegged to one's salary makes somewhat more sense in that people can at least get their heads around this notion. But these estimates can vary widely too, depending on how much you earn, whether you're married and other factors.

In his new book Investing for a Lifetime, for example, Wharton professor Richard Marston estimates that a single person with a pre-retirement salary of $50,000 would need 12.8 times salary tucked away by retirement vs. just 8.5 times pay for a married couple. Raise their respective pre-retirement incomes to $100,000, and those multiples jump to 14.8 and 11.5.

Calculator: How much will I need for retirement?

I think the better way to go is to focus on the amount of income you'll need to maintain your standard of living in retirement. Yes, that requires some assumptions too. But during most of your career you can use a benchmark of 70% to 80% of salary and then refine your estimate by doing a retirement budget when you get within 10 or so years of actually retiring.

Once you have an idea of how much income you'll require, you can then estimate how much you're on pace to receive from Social Security, pensions and withdrawals from retirement accounts. This approach gives you a better sense of whether you're on course toward achieving an acceptable standard of living in retirement.

For example, if you're living on $80,000 a year now and find that you're on pace to generate only $40,000 annually in retirement, you can easily see you've got to step up your retirement planning efforts. That may not be as clear if you see only that you're on track to accumulate a $500,000 nest egg.

A retirement income calculator that uses Monte Carlo assumptions to simulate the ups and downs of the economy and the financial markets can help you do this analysis. You plug in such information as your salary, annual savings, the value of your retirement accounts and how you have that money invested, your projected Social Security benefit, when you plan to retire and how long you'll need your savings to last, and the calculator will tell you the probability that your resources will be able to deliver that level of income for as long as you need it.

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If that probability is uncomfortably low -- say, less than 80% -- you can easily re-run the analysis to see how saving more, investing differently, postponing retirement or scaling back your retirement lifestyle -- can improve the odds. By repeating this exercise every couple of years -- or annually in the five to 10 years leading up to retirement -- you can gauge whether you're making progress toward your goal and adjust if necessary.

If you don't feel confident about doing this sort of assessment on your own, you can find a trustworthy adviser who can do it for you.

Ultimately, the lifestyle you'll be able to afford in retirement will depend on how much income you'll be able to generate not just from your nest egg but all your retirement resources, including Social Security, pensions, occasional work, etc. Focus on that, and you'll have a much better sense of whether you're on track toward a secure retirement and, if not, what you need to do get there.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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