Emily Brandon

Recent retiree William McElhaney, 67, has about $500,000 invested in annuities and stocks and owns two rental properties. Will that be enough money to last the rest of his life? "It's a roll of the dice," says the mechanical engineer, who retired in January. "You hope to have enough to last you and that you don't have a lot left over."

McElhaney lives modestly in a one-bedroom condo in Charleston, S.C., has no debt, and isn't averse to taking on engineering project work should he need the money. He thinks that the sum of his stock portfolio earnings, annuity payments, rental income, and Social Security checks should cover his expenses through his retirement. "According to the budgeting that I have done, I hope to clear just about what I was taking home when I was working," he says. His biggest retirement worry is developing an expensive health problem. "I'm in very good health and I am expecting to live to maybe 85, but I don't know what healthcare issues may arise."

Few Americans know how much they need to save for retirement. Less than half of current workers have even attempted to calculate how much money they will need, according to a recent Employee Benefit Research Institute survey. Among those who have a retirement savings goal, 41 percent think, like McElhaney, that they need to accumulate at least $500,000 in order to retire comfortably. Here's how to tell if you are saving enough.

Monitor current expenses.

Unless you're intending to enter retirement mortgage-free or to downsize significantly, it's safe to assume your expenses will remain largely the same once you stop working. "I really don't think my expenses are going to go down that much because I'm going to have more free time on my hands and I am going to want to travel more," says Mark Benson, 56, a risk manager for a pipeline company in Indianapolis. "I am pretty much budgeting that things are going to cost the same." Since he aims to withdraw no more than 4 percent of his savings each year, Benson calculates that he will need to save $1.2 million to maintain his current standard of living after retirement at age 66.

While most people are able to eliminate some costs when they retire -- say, for professional work clothes and transportation to and from the office -- they also incur new expenses as they increasingly require assistance with home maintenance and develop health problems that require medical care. Retirees who travel or take up expensive hobbies may even see their cost of living increase. Says Constance Stone, a certified financial planner and president of Stepping Stone Financial in Chagrin Falls, Ohio: "Work off the scenario that you are going to spend about the same as you do now in retirement."

Factor in Social Security benefits.

Most Americans don't have to finance retirement completely on their own. Some employees have traditional pensions or purchase annuity products that guarantee income for life. Retired workers also received Social Security checks worth an average of $1,167 in February 2010. Although you are not likely to be able to sustain your desired lifestyle using Social Security alone, you will have a nice base to build upon.

Adjust for inflation.

Inflation erodes the value of your savings and reduces your purchasing power in retirement. Social Security payouts and some traditional pensions are adjusted for inflation each year. You should choose investments that generally grow faster than the overall rise in costs. One type of government bond, treasury inflation protected securities (TIPS), promises a rate of return above inflation. Other popular hedges against inflation include some exposure to stocks, commodities, and real estate.

Budget for taxes.

Your entire 401(k) balance isn't available for spending in retirement. Regular income tax is levied on withdrawals from traditional 401(k)'s and IRAs. If you withdraw $20,000 from a retirement account and are in the 25 percent tax bracket, $5,000 will be due to Uncle Sam. Withdrawals from 401(k)'s and IRAs -- and the resulting income tax -- generally become required after age 70½. The minimum distribution amount each year is calculated by dividing the balance of your tax-deferred retirement accounts by your life expectancy as determined by the Internal Revenue Service. Retirees who fail to make the required withdrawals will be hit with a tax penalty equal to 50 percent of the amount that should have been withdrawn. No income tax is generally due on Roth 401(k) and Roth IRA distributions in retirement because you already paid taxes on that money before it was deposited.

Consider health expenses.

Healthcare costs can make a huge dent in your retirement savings. Even after retirees qualify for Medicare coverage at age 65, they must still pay premiums, deductibles, copays, and for common uncovered items such as eyeglasses and dental care. Out-of-pocket medical expenses throughout retirement for a 65-year-old couple retiring in 2010 could be as much as $197,000 (according to the Center for Retirement Research at Boston College) or $250,000 (Fidelity Investments' estimate). Neither of these figures includes the cost of long-term care, such as assisted living or nursing home facilities, which could easily be the biggest retirement expense of all. "Just about half of my clients have had knee replacement and then have to get care in the home," says Susan Spraker, a certified financial planner and founder of Spraker Wealth Management in Maitland, Fla. "People are not planning for what they are going to do when they can't live on their own anymore." Costs could be even higher in the future. The Urban Institute recently projected that median out-of-pocket healthcare costs for retirees will rise from about $2,600 in 2010 to $6,200 annually in 2040, in constant 2008 dollars.

Make savings automatic.

Socking away money for retirement as soon as you begin working full time is generally the best way to accumulate a large retirement account balance. "You should be saving a minimum of 10 percent of your gross income in 401(k)'s or taxable accounts," says Scott Leonard, a certified financial planner and chief investment officer for Trovena in Redondo Beach, Calif. Workers who start saving later in life may need to tuck away an even higher percentage of their salary. To make saving painless, consider stepping up your retirement savings each time you get a pay boost. "Every time you get a raise, take 20 percent of the value of that raise and put that into savings," Leonard says.

Robert Rinaldi, 62, of Arlington, Va., has really made saving a habit. He began contributing to IRAs in the early '80s through a monthly direct deposit from his checking account. "I never saw that money," he says. Rinaldi accepted an early retirement offer from the Department of Agriculture in January but continues to work part time as an usher at baseball and football games for the Washington Nationals and Redskins. He hasn't stopped saving since exiting his full-time job. With part of his usher income, Rinaldi continues to fund a Roth IRA for later on.

Grow Your Nest Egg.

Automate your savings by having a portion of each paycheck directly deposited into a retirement account. Take full advantage of employer contributions and avoid taxes and investment expenses that cut into returns.

Maximize your 401(k) match.

A vested employer 401(k) match is an instant return on your investment.

Delay taxes.

Retirement savers can contribute up to $16,500 to a tax-deferred 401(k) in 2010, which jumps to $22,000 for those age 50 and older.

Avoid investment fees.

Shop around for inexpensive investment options in order to maximize returns.


Personal Finance - Sizing Up Your Retirement Nest Egg Needs

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