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Simple ways to calculate your retirement income needs

February 08, 2011

By Barbara Marquand | Money Rates Columnist

We've all punched numbers into the retirement calculators and agonized over which 401(k) investment funds we should choose. We've watched our retirement and savings accounts expand (in the 1990s) and contract (the last decade), and through it all we remain essentially clueless about how much money we need in our savings accounts or investments in order to retire comfortably.

Recent studies show that millions of Americans will be financially unable to quit working before they die, and a recent survey by Nyhart, an actuarial and employment benefits firm, found that more than 80 percent of American workers won't be able to retire by the age 65. Those folks are expected to have to work until an average age of 73.

If you feel you fall into this category, do not despair. There is hope for you yet.

Retirement savings--an easy calculation

An increasingly popular approach to retirement savings has simplified the job for those of use worried we aren't pumping enough into our 401(k) accounts, money market account or savings accounts.

It works like this: multiply your annual salary by 10 or 12 to come up with how much you'll need to save in order to retire without running out of money. So if you make $50,000 a year, you need to have $500,000 to $600,000. If you're making $100,000 a year, you'll need $1 million to $1.2 million.

The beautiful part of this approach, pioneered by financial advisor Charles Farrell in 2005, is that it's easier to gauge where you stand as you get older. Under Farrell's formula, by the time you hit 50, you should have 5.2 times of your income set aside. That $50,000-a-year worker should have $260,000 saved up. You need to save 12 to 15 percent of your annual income in order to get there.

Attainable approaches to retirement

Other asset-salary ratios calculate your retirement needs differently. The financial services company TIAA-CREF, for instance, estimates you need to save 8.5 times your annual salary by 65 in order to retire.

These calculations suggest retirees can spend a portion--5 percent under Farrell's approach--of their savings to live on after they retire. Social Security, which pays an average of $1,100 a month, makes up the remainder.

The advantage of these approaches is that they give you attainable benchmarks--unlike other retirement approaches that give you a large, daunting number that feels impossible to achieve and thus discourage people from even trying.

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