How much money do you need to retire?

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Do you need $1 million to retire, as some experts have suggested? Or is it $2 million for a retired couple? Or is it 10 times your current annual salary, or 12 times?

There are many ways to figure how much money you need in retirement, just like there are different methods to make money in the stock market. But here's the best method I've seen, which requires a bit of math but nothing too challenging.

First, figure out approximately how much you'll need to spend, either on an annual basis or a monthly basis. If you do it by the month, don't forget to add in expenses that only come once or twice a year, such as insurance bills, tax bills and vacation bills.

How do you estimate how much money you'll spend in retirement? You know how much money you're currently earning. So that tells you roughly how much you're spending now. It provides a baseline number for how much you'll spend in retirement. But there are adjustments:

-- Deduct the amount you've been saving every month. Obviously, after you retire, you won't be saving for retirement anymore.

-- Deduct what you've been paying in payroll tax since you won't have a paycheck anymore. You might also estimate a new income tax level, which likely is less than what you're paying now.

-- Deduct how much you'll save in taxes, utilities and other expenses if you're moving to a less-costly housing arrangement, either by downsizing, moving to a cheaper area or both.

-- Factor in your changes in lifestyle. For people who intend to travel the world in retirement, those expenses might actually increase. But for most people, the expenses will go down. You won't have commuting expenses, your clothing budget may be less and your grocery bill may even go down since you'll have more time to shop for sales.

-- Factor in any changes in what you'll spend on your kids. This is a number that varies widely depending on the situation -- and it may change over time -- but you still need to take it into account.

All these adjustments should bring down your cost of living significantly, by as much as 30 percent, or even 40 percent or 50 percent. You have a lot of control over how you're going to live your new, retired life, and therefore you have a lot of control over your expenses.

Finally, factor in an adjustment for health care. A few people -- those who've been paying for their own individual health insurance -- might actually see their medical insurance expense go down when they join Medicare. But most people will likely spend more on health-related services as they get older. So you need to check your health insurance options and also do a realistic evaluation of your own health.

Financial experts estimate that the average person, after it all nets out, will need about 75 percent to 80 percent of their preretirement income to sustain their standard of living after they retire. But this is just a rule of thumb. Do your research, and then do the math to see how much retirement savings you need. Here's the math:

-- Add up the retirement income you'll receive on a regular basis -- again either monthly or annually -- from Social Security, a pension, rents or royalties and any other recurring income.

-- Subtract your income from your expenses. If your result is zero or negative ... congratulations! You have more than enough income. But in retirement, most of us will have more expenses than income, so we'll end up with a positive number that represents the income gap we need to close with our savings.

-- Now multiply the number of your yearly gap by 25. That gives you the amount of savings you need so you can withdraw the recommended 4 percent annually.

For example, suppose you'll spend $5,000 a month to keep yourself fed, clothed, housed and happy in retirement. You estimate you're getting $1,500 a month from Social Security and $1,500 a month from your pension, for a total of $3,000 a month. That results in a shortfall of $2,000 a month, or $24,000 per year. And $24,000 x 25 = $600,000. That's the amount you need in your individual retirement account, 401(k) or other savings vehicle to close the gap of $2,000 a month.

Like all the other numbers you project into retirement, these are estimates and averages. But you're probably not average. So by doing some homework, you can customize your own retirement plan and finance your own retirement lifestyle.

Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement and other concerns of baby boomers who realize that somehow they have grown up.

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