Given the economic landscape over the last few years, figuring out how much money you need to have for your retirement is not a question to take lightly. But, as many financial planners and retirement experts say, there's no one-size-fits-all approach to answer that question.
You can't control what the government or employers do, so instead focus on what you can do yourself today to prepare for retirement.
Barbara Taylor, financial adviser and retirement coach with ING Financial Partners
"There are different schools of thought on how much you need to retire," says Barbara Taylor, a financial adviser and retirement coach with ING Financial Partners. Some say that you'll need 70 percent of your current income; others say you can withdraw 4 percent of your nest egg each year, she explains.
"The flaw in both approaches is assuming that current expenses will be the same in retirement. New expenses will arise -- in particular, health care, long-term care, even relocation/moving -- while others may fall," she said.
William D. Pitney, a certified financial planner and founder of Focus YOU, a California-based financial services firm, agrees that while so-called rules can offer a starting point, people should be leery about sticking too closely to them. "They cannot replace detailed planning that accounts for the specifics of an individual's situation," he said.
Know Where You Stand
Instead of following a set formula, assess where you are financially, and think about the retirement lifestyle you wish to have. "Pre-retirees need to consider three important factors when asking the how much question: Risk tolerance, potential longevity and sources of income -- defined benefits, Social Security, pensions, earned income or rentals," said Taylor. They also need to consider how they want to live in retirement -- where they want to live, how often they want to travel, etc. -- so they can make sure to save enough money.
The first step toward creating a retirement plan, is to start with all of the known parts to come up with two basic numbers, says James Poe, founder of Texas Retirement Specialists,. "The first number is how much income you require just to maintain your basic lifestyle; and the second number is how much income you would really like to have in order to retire the way you want to live," he said.
Those figures take into account things such as the amount of your Social Security benefit, your pension -- if you're fortunate enough to have one -- your 401(k) or 403(b).
"From there, you have to figure out what your investment accounts are earning, and will that be enough to get you through the remainder of your life. If not, what can you do to increase your returns, reduce your taxes, rearrange debt, etc., that would make your plan work?" asked Poe.
That's where financial professionals come in. To help work through some of this analysis, Pitney says that even as early as 25 years before you plan to retire, you'd be wise to meet with a CFP who specializes in retirement planning.
"The CFP will calculate and project long-term retirement needs, and also help determine how much investment risk is required to meet your goals," he said.
Put Your Money to Work
Of course, you have to go beyond just creating spreadsheets and fantasizing about your retirement years, and put real dollars behind your plan. Easier said than done if you're living on a tight budget. Still, every little bit counts, and the sooner the better. "Many people don't appreciate the power of compounding," said Taylor. "Compounding is so beneficial; you let your money work for you over time."
"Decades ago, most workers could depend on a traditional pension, Social Security and personal savings for retirement," said Pitney. Today, the main source of retirement savings will be in the form of 401(k) or 403(b) type plans that are funded mostly through employee contributions. "As such, there is never a time that's too early or too late to set aside money to fund your retirement nest egg."
If you're not in the position to invest or build a portfolio, at the very least, you'll want to contribute to your company retirement account, says Poe. "Especially if your employer offers a retirement plan with a match, you really want to get in as soon as possible. In time, that first contribution can be a lot of money with long-term growth working in your favor."
Beyond savings, you could also look into ways to reduce expenses during the retirement years, especially because medical and health care costs will likely rise, says Pitney. Some goals to consider include paying off your mortgage before retiring, or refinancing to reduce your monthly payment; paying off consumer debt; taking care of home improvements while you are still employed and considering long-term care insurance.
Ultimately, it's important to know you have options. "Once you determine your core living expenses and clarify your retirement goals, a detailed retirement analysis will help you decide which strategy is right for you," said Pitney. You may choose to delay retirement and work longer, increase your investment rate of return, reduce retirement expectations, or try a combination of all of these.
The key is stop putting off thinking about your retirement. "You can't control what the government or employers do, so instead, focus on what you can do yourself today to prepare for retirement," said Taylor. "You can choose to save and invest for the sake of your retirement success."
Retirement Number Crunching
While most calculators are overly simplified and produce wildly varying results, William D. Pitney, a certified financial planner and founder of Focus YOU, a California-based financial services firm, says the following sites can point you in the right direction.
CFP Board's Consumer Advocate -- Resources to address your financial situation and help you identify financial planning assistance to meet your needs.
Let's Make a Plan.org -- Explains what financial planning can do for you, and how to find a certified professional.
Sperling's Best Places -- Helps you research different cities for information such as cost of living, real estate trends and population statistics.
Social Security Estimator -- Use this tool to predict what your Social Security benefit might be according to your retirement date.