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How Much Should You Save for Retirement?

John Divine

Figuring out how much to save for retirement is one of the most important financial decisions you'll ever make.

Yet as Americans, it turns out we aren't very good at putting enough money away for the golden years. According to a recent 4,854-respondent Merrill Lynch/Age Wave study, only 27 percent of pre-retirees who are 50 or older feel financially prepared to fund their a retirement that lasts even 10 years.

Moreover, 81 percent of people don't know how much money they'll need to fund their retirement.

So if you're one of the four out of five people who doesn't know how much to save for retirement, keep reading and you'll have a much better idea.

[Read: 12 Money Moves to Make in 2017 to Retire Happy.]

Why you should be saving more money than you might think. "Remember that retirement can last 20, 30 or more years. Over that time, many things may change, such as the economy, taxes, inflation, family, friends and one's own health and financial situation," says Catherine Collinson, president of Transamerica Center for Retirement Studies.

Rising life expectancy alone means that retirement saving is a lifetime job.

"A man reaching age 65 today can expect to live, on average, until age 84.3. A woman turning 65 today can expect to live, on average, until 86.6," says Bob Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania.

Being able to finish your career and retire with a comfortable gob of money that can stand the test of time is a luxury, not an inevitability, these days.

Another major variable affecting how much you should save for retirement -- besides rising life expectancy -- is inflation.

"Even though inflation rates have been low during recent years, inflation can still rob your savings," says Richard W. Rausser, senior vice president of client services at Pentegra Retirement Services. "For example, over a 30-year period, a relatively low average annual inflation rate of 3 percent will reduce the purchasing power of a $200,000 retirement savings account to $82,397."

And while medical breakthroughs may bring the cost of some treatments down over time, you can bet your bottom dollar that saving up for health care costs isn't a bad idea, as they've had a tendency to soar over the years.

[Read: 9 Websites to Help You Make Retirement Income.]

Of course, the most jarring thing about retirement from a financial perspective is that you won't have the same sort of income streams coming in that you did while you were working.

So you should probably plan to save more money than you're saving now if you want to retire comfortably. But how do you figure out exactly how much to put away?

How much to save for retirement. "To determine how much income will be needed from your retirement savings, the first step is to make a realistic assessment of how much income will be absolutely needed to take care of your essential needs (without the luxuries). Then take an inventory of all sources of guaranteed income in retirement, such as Social Security and any pensions," says Rich Thompson Jr., founder and financial strategist of Advanced Legacy Concepts in Atlanta.

For instance, if you make $80,000 a year and need 80 percent of your current income to get by in retirement, you know you'll need $64,000 in gross annual income as a retiree.

Then, consider the cash flows you'll have coming in from the likes of Social Security and pensions; for the sake of an example, we'll call that $1,800 per month. Multiply that by 12 and that's $21,600 in annual income. Subtracting $21,600 from $64,000 gives you a difference of $42,400, which you'll be needing to withdraw from your savings each year.

Now we can use the old rule of thumb, the 4 percent rule, to figure out how much to save for retirement to meet those goals. The 4 percent rule states that if you withdraw 4 percent of your total savings each year of retirement, adjusting future withdrawals for inflation, your savings should last a total of 30 years.

It's a rough and dirty rule, requiring a lot of assumptions: How long will you live? How much will inflation be in the future? What will the market's return on investment be over the next few decades? Some advisors consider a 3 percent rule to be more realistic due to lower expected market returns going forward, but that's another story.

Using the 4 percent rule and the $42,400 figure, you will need to save up $1,060,000, or just over $1 million, to live comfortably in retirement.

Tips for retiring well. "Take advantage of compounding by starting to save as early as you can, but remember that it is never too late to save; increase your 401(k) savings every time you get a pay raise, no matter what; and do not put all of your eggs in one basket -- diversification is key," Rausser says.

Setting away 10 to 20 percent of your paycheck, if possible, is a good saving habit, and if you routinely invest that money in low-cost index funds and keep debt down, you'll make things much easier on yourself.

Do your own calculations to try to figure out how much money you need for retirement; retirement calculators abound on the web, and you can make personalized assumptions that no article can.

[See: 20 Awesome Dividend Stocks for Guaranteed Income.]

Everyone's magic number is different, and not everyone will be able to reach their number on the nose. But when it comes to saving for retirement, the term "ignorance is bliss" does not apply.

John Divine is an investing reporter for U.S. News & World Report, where he covers financial markets and the economy, with a focus on individual stock analysis. He has been an investor himself for over 10 years, and has been writing professionally about stocks and investing for the last five years. He previously wrote about the stock market for The Motley Fool and InvestorPlace, and his work has appeared on Yahoo! Finance, MSN Money, and AOL DailyFinance. He graduated from Appalachian State University in 2011 with a bachelor's degree in finance and banking. At Appalachian, he was a member of the Bowden Investment Group, a team of students that ran a real-money portfolio worth over $100,000. You can follow him on Twitter or give him the Tip of the Century at jdivine@usnews.com.