How Much to Save for Retirement?

How much do you need to save for retirement? Will a million dollars be enough? Two million? Five million?

If only you could look into a crystal ball and find out exactly how long you're going to live...

My philosophy has always been to save as much as I can. Max out the 401k contributions, max out the Roth IRA contributions, take advantage of the catch-up contributions. Build a diversified portfolio of after-tax investments as well.

I've looked at a number of retirement planning calculators, but there are always so many variables, so many unknowns. How long will you be in retirement? (i.e., when are you going to die?) What will be the rate of inflation? What return can you expect on your investments?

One myth starting to be dispelled is that you will need less income in retirement than when you were working. No more commuting. Fewer lunches out, no more business suits. No more 401K contributions. The kids should be on their own, and maybe you'll downsize to a smaller home. You'll qualify for senior discounts.

But with more leisure time on your hands, maybe you'll dine out more and attend more cultural events. You will like more "creature comforts." What if you take up expensive hobbies like golf or world travel? Maybe you'll need more help around the yard or the house. And don't forget skyrocketing health care costs. It's possible your monthly expenses could go up instead of down after you retire.

My goal has been to postpone withdrawing money from my retirement accounts as long as possible, preferably until I reach age 70 and a half, and the IRS makes me. But making that transition from building a retirement a fund to drawing it down will be scary. What if I run out? What if I outlive my money?

I recently attended a retirement planning seminar where the facilitator finally gave me a formula that made some sense:

•  Estimate your monthly expenses by using your current expenses as a starting point.
• Add up your expected fixed income, such as Social Security, pensions, annuities.
• If your estimated monthly expenses exceed your anticipated monthly income, multiply the shortfall by 12 to annualize it.
•  Multiply that number by 25.

For example, if I estimate I will need an extra $2000 a month beyond my projected retirement income, I will need to withdraw $24,000 a year from other savings, which means I must accumulate at least $600,000 before I retire. This is known as the Rule of 25, also known by its inverse, the Rule of 4%. The Rule of 4% states that, on average, your nest egg should last through retirement if you keep your withdrawal rate at or below 4%.

Just an estimate, I know. Maybe it won't be enough. So many variables. But it's a start. It helps to have a goal and then try to exceed it.

How are you planning for retirement? I would love to hear your comments.

Sharon Marchisello is the author of Live Cheaply, Be Happy, Grow Wealthy