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Retirement Goal-Setting: Factors to Consider and Available Resources

One of the most common investment goals is accumulating a nest egg for retirement. How much do you need to retire? The short answer is that "it depends."

Some people can live happily on about half of their pre-retirement income while others require 100% (or more) to maintain, or even enhance, their lifestyle. For many people, 70% to 80% of the amount that they earn during their working years is a realistic income replacement percentage and one that is commonly quoted in financial publications.

There is no "one size fits all" answer when it comes to retirement planning. A lot depends upon a person's goals (example: travel and hobbies) and lifestyle decisions (example: where you choose to live), as well as available resources such as an employer pension and/or free or low-cost retiree health insurance from a previous employer.

Michael Stein, in his book The Prosperous Retirement, notes that there are three distinct phases of retirement: active, passive, and final. Expenses during the early years (active phase) of retirement can equal, or even exceed, those during the years before. Often, expenses decrease in later years (passive phase) but may increase again during the final phase due to medical expenses and/or long-term care costs.

The best way to make an accurate estimate of how much you'll need is to track current living costs for a month or two. Then use this information to project the amount of income that you'll need in the future. Consider expenses that will end or decrease in retirement. Common examples are:

• commuting costs and business travel
• union dues
• 401(k) plan contributions and Social Security taxes

Perhaps your mortgage will also be repaid by the time you retire and you will have launched your children successfully into adulthood.

Now consider expenses that are likely in begin or increase. Common examples are:

• travel and hobbies
• health care costs, dental expenses, Medigap health insurance premiums, and/or long-term care insurance
• gifts to children and/or grandchildren

Inflation will also increase expenses over time. Thus, a reasonable inflation rate (3% to 5%) should factored into retirement savings calculations. Retirement analyses should be accurate enough so that people neither save a lot more money than they need to nor have to drastically lower their standard of living after retirement.

A good resource to make a rough estimate of the amount of money you'll need is the Ballpark Estimate worksheet on the American Savings Education Council Web site at www.asec.org. Additional planning tools from universities in the Cooperative Extension System can also be found in the "Calculating What You Need to Invest" section of the Investing For Your Future home study course at www.investing.rutgers.edu.