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Do You Know Your Retirement Number?

Kimberly Palmer
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If you know how much money you need in the bank to comfortably retire, you're in the minority: Only 1 in 10 people make such a calculation, according to the Transamerica Center for Retirement Studies. That might explain why Americans are on track to replace an average of only 60 percent or less of their income during retirement. Financial advisors generally agree that retirees need to replace 80 percent or more.

That means someone who brings home an $80,000 salary at the peak of his working years should save enough before retirement to generate at least $64,000 a year post-retirement. An investment, like an annuity, that generates a 3 percent annual return would require savings of at least $2.1 million to throw off that sum annually. (Retirees can also supplement their income by continuing to work part time, as well as with Social Security payments and pensions.)

Yet, more than half of Americans report having less than $25,000 in savings and investments, according to the Employee Benefit Research Institute, a nonprofit research organization. The EBRI also reports just 13 percent of workers say they are "very confident" they will have a comfortable retirement. The first step to joining that more self-assured group is to figure out how much money you'll need. Here are six easy ways to do just that:

1. Use a calculator. Online retirement calculators can estimate for how much you should have in the bank before retirement. Figure out if you're on track, based on current savings rates, or if you need to ramp up. "That first calculation is as frightening as it is a good one to scare you half to death on how much you have to save if you live to 90," says William Sharpe, a Nobel Prize winner in economics and Stanford University professor.

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2. Take a shortcut to generate a ballpark figure. John Ameriks, head of Vanguard's investment counseling and research group, recommends estimating the amount you need in retirement by multiplying your current salary by 12. "People shouldn't get too comfortable until they have a number that's 12 or more times their current salary, so $600,000 for $50,000," he says.

3. Save 18 percent. That's the savings rate a medium earner ($43,084 in 2010) would need if he or she starts saving at age 35 and plans to retire at age 68 (assuming a 4 percent return on investments), according to the Boston College's Center for Retirement Research. The center issued a brief in November 2011 that provides recommended savings rates based on a variety of factors, including retirement age, rate of return, income and age that contributions begin. (The savings rates would allow retirees to replace 80 percent of their working salaries and calculations factor in Social Security income.) The Employee Benefit Research Institute reports that, on average, employees contribute just 7.5 percent of their income into their retirement accounts.

The analysis found that the two most important factors for creating a retirement nest egg are one's savings rate and the age of retirement. "If people could work until they're 70, they would have a much higher chance of having a secure retirement. Social Security is higher if you wait until age 70, and it gives your 401(k) assets a longer chance to grow, and it reduces the number of years you have to support yourself," says Alicia Munnell, the center's director. Less important was the rate of return earned on investments.

[See: 6 Steps to the Retirement Lifestyle You Want.]

4. Think bigger. While many retirement models use a standard 80 percent income replacement rate to project how much workers should save for retirement, Olivia Mitchell, director of the Boettner Center for Pensions and Retirement Research at the University of Pennsylvania, says that's not enough. She recommends aiming for a 100 percent replacement rate instead. "Many boomers have been thinking of doing different things in retirement -- things that cost money. They're not sitting on the front porch on a rocking chair; they're volunteering, traveling ... and health care costs are likely to be a lot higher in the future as well," she says.

5. Don't forget Uncle Sam. According to the Michigan Retirement Research Center, married college graduates -- people who are otherwise among the most prepared for retirement -- often forget to consider just how much of their retirement income will be going to Uncle Sam. Only 3 in 4 people in this group are prepared for retirement after taxes are taken into account; otherwise, 92 percent report being ready.

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6. Minimize fees and maximize returns. Investing fees can take a big bite out of returns; the think tank RAND calculates that even just a 1 percentage point difference in annual fees adds up to $3,380 after 10 years on a $20,000 account balance. Check up on the fees you're currently paying and consider moving into index funds or other types of funds with lower fees.

Finding your number might be intimidating, but it can also provide some much-needed motivation to make a retirement savings plan -- and stick with it.

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