Your Retirement Income: Will It Be Enough?

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How much money will you need to retire? Probably more than you think! Extended life spans, reduced employer benefits, lower market returns and increased costs of living have forced us to have to save more. Unfortunately, most Americans are doing a poor job of securing their future. The Employee Benefits Research Institute reports that if current trends continue, by 2030, the annual shortfall between the amount retired Americans need and the amount they actually have will be at least $45 billion. If you want to avoid having to flip burgers at age 75, one of the best things you can do for yourself is to calculate now how much you'll need in the future.

The Need to Plan

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Two generations ago, corporate pensions and social security ensured a secure retirement for our grandparents. Today, pension plans have become virtually extinct, shifting the burden of retirement savings away from corporations and onto the employees. Our retirement depends largely not only on our own ability to save and invest wisely, but also on our ability to plan.

According to an April 2009 report by the Congressional Research Service, in 2007 47% of workers had no retirement savings at all. The rest had very little. Of workers age 55 to 64, 69% reported household retirement account balances of less than $100,000. Most of these people will be forced to extend their work years or accept living in poverty. How can this disastrous scenario be avoided?

How Much You Need in Total

Your first step in planning is determining how much you'll need.

Studies indicate that retirees will need to between 80% and 90% of their pre-retirement income to maintain their current standard of living. So, a reasonable target is one that will provide you with an annual income similar to the income you have now. Then you need to consider a "safe" withdrawal rate. This is the percentage of your retirement nest egg you will withdraw each year during your retirement. Research indicates that, if they have saved enough, retirees can best preserve their assets if their annual withdrawal rate is 6% or less. This provides a quick and dirty formula for determining the total amount you need to save by retirement: divide your desired annual income by the withdrawal rate.

So, for example, if you want to target a retirement income of $60,000 per year, you need to save $1 million ($60,000 / 0.06). The following table offers some quick estimates of how much you might need to accumulate before you can retire.

Annual Retirement Income Need	Total Nest Egg Required (Estimate)
$50,000	$833,333
$100,000	$1,666,667
$175,000	$2,916,667
$250,000	$4,166,667

How Much You Need to Save Each Month

Keep in mind that the above table is based on a rough formula. When calculating your target nest egg, and how much you have to save each month to reach that target, there are many factors that come into play:

• Your current age.
• Intended retirement age. 
• Life expectancy.
• Current earnings.
• Income sources during retirement.
• Amount of current retirement savings.
• Expected savings contributions.
• Cash outflows during retirement.
• Portfolio risk/return.
• Inflation.

Incorporating some of these factors, the following table illustrates how much you'd need to save each month, if you started from zero at various years before retirement, to realize a $1 million savings. The table assumes that your annual investment rate of return on your savings is 8% (which cannot be guaranteed).

Number of Years Left Until Retirement	Monthly Amount Required to Save (to attain $1 million goal)
35	$435.94
30	$670.98
25	$1,051.50
20	$1,697.73
15	$2,889.85
10	$5,466.09
Assuming an 8% Rate of Return

Clearly, planning for retirement is not something that you do shortly before you stop working. Because of the magic of compounding, the earlier you start, the less you'll have to save on a monthly basis — as illustrated in the table above. Lower rates of return or higher inflation, of course, will require a much higher contribution.

Planning for retirement is a lifelong process. Throughout your working years, your planning will undergo a series of stages in which you will evaluate your progress and targets and make decisions to ensure you reach them.

Resources for Saving for Your Future

Now that you have an idea of how to determine how much you need, it's time to start using the tools available to you. First you need to learn about the types of retirement savings accounts, such as IRAs — and start reaping the associated tax benefits.

In summary, planning for your retirement is an ongoing process. The earlier you start, the better off you'll be. The key is to save, save, save! The more time you have on your side, the better your outcome should be. This requires discipline, self study and time. So, take advantage of the many tools available to ensure your success.

Cathy Pareto, MBA, CFP®, AIF®, is the founder and president of Cathy Pareto & Associates, Inc., Investment Management and Financial Planning. Cathy has more than 12 years of experience in the financial services industry. After a 10-year engagement as a senior financial advisor with a large investment management firm, Cathy decided to pursue her passion for helping individuals, families, small businesses, young executives, and other professionals that have substantial investable assets, but who fall below most large investment advisory firms' account minimum requirements.