How much will you need to save before retiring?

Many of us are still living in the past when it comes to planning for retirement.  Sure, we know that unlike previous generations we can't rely on generous Social Security benefits or fat corporate pensions.  And we know that we can't count on double-digit market returns to make up the difference.

But as a recent Fidelity survey shows, we're not all that confident that we (or our parents) will be able to retire in the style to which we've become accustomed — if we are able to retire at all.

Some interesting statistics from the Fidelity survey:
Four in 10 Americans are somewhat or very concerned about their parents' preparedness for retirement.  What mistakes did they say their parents made?

• Started saving too late
• Didn't save regularly
• Underestimated health-care costs
• Didn't get help and advice

The truth is that the lifestyle you can afford in retirement largely depends on you.  How diligently you save.  How wisely you navigate today's challenging markets.  And, most importantly, how realistic you are in the assumptions you make about your retirement planning.

Your best bet before you go ahead and start putting the numbers into a retirement calculator is to answer some really key questions about those assumptions and the life you hope to live.

Do you need $1 million to retire comfortably?
No.  Sure, it would be nice to accumulate seven figures, but for most of us that goal is unreasonable and unnecessary.  The fact is, most Americans can call it quits with assets well below $1 million.  And if you don't build up as much as you'd hoped, there are a variety of moves you can make to compensate.

For example, if your home has increased in value, you may be able to downsize to smaller digs (or move to a cheaper locale) and come away with a tidy profit.  If you're not interested in moving on and moving out, you can still convert your home's equity into tax-free monthly income by taking out a reverse mortgage.

Will retirement living cost as little as I anticipate?
Not necessarily.  The rule of thumb here is that you can comfortably live on 70 to 80 percent of your pre-retirement income because taxes and job-related expenses (commuting, work clothes) drop once you leave the work force.  But rules of thumb are made to be broken, and while that 70 to 80 percent works on average, there may be a lot of reasons why it wouldn't work for you. 

For example, if you're planning on paying off your mortgage and paying for your children's college before you retire, you're probably in good shape.  But if you've refinanced your mortgage and will have to continue paying after you stop working, that might be a problem.  And if you're planning to travel to all the places you couldn't see while you were chained to your desk, you may end up spending even more.  The key is to plan a budget for your retirement life.  Researchers have found that people who take the time to do this are more likely to be come up with an accurate assessment and less likely to err on the downside. 

So, if you're within 10 years of retirement, estimate your future expenses as best you can — vanguard.com has a good worksheet in its retirement planning section.  If retirement is more than a decade away, figure you'll need at least 90 percent of your pre-retirement income.  If that means you end up with more than you need, you can always decide to live larger.

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They say historically the market has returned between 10 and 11 percent.  Can I expect to earn that much on my investments?
Nope.  Anticipate 6 to 8 percent instead.  We all got a little spoiled in the '80s and '90s.  As they say on TV, past results are not indicative of future performance.  Given that stock prices compared to earnings are still a little lofty right now, you're better off betting on 8 or 9 percent for stocks and 5 to 6 percent on bonds, for a diversified portfolio of 6 to 8 percent a year.  Clearly, lower returns mean you'll have to sock away more cash to meet your goals.

How much more cash will I have to put away?
To build a $500,000 cache in 20 years, here's how much you'd need to put away each month:

At 10 percent return: $690
At 8 percent return: $875
At 6 percent return: $1,100

Having more time, though, really cuts those numbers.  If you have 30 years:

At 10 percent return: $240
At 8 percent return: $355
At 6 percent return: $510

How long do I need my money to last?
Thirty years or more.  For better or worse, that's how much time you could spend in retirement — almost as much as you spent in the workforce.  The problem most of us have is that we underestimate how long we'll live.  That's because the concept of life expectancy is a little tricky.  A 65-year-old man in decent health has a life expectancy of another 20 years.  That doesn't mean the same thing as having 20 years to live.  What that means is that 20 years from now, half of those 65-year-olds will likely still be alive — some for many more years.   That means it's prudent to plan to live to 95 if not longer.

Can you count on Social Security to kick in something?
Yes.  There's no one reading the newspaper who doesn't know that Social Security has problems, the biggest being that we'll have fewer workers supporting each retiree as the baby boomers leave the workforce.  But the notion that the system is in such bad shape that future retirees will receive little or nothing is totally overblown.  Even if the trust fund runs dry — as it's predicted to do in 2042 — there would be enough money coming in from payroll benefits to fund 73 percent of current scheduled benefits.  As a practical matter, if you're within a couple of decades of leaving your job it's safe to assume you'll get your currently scheduled benefits (you can find them at the calculator at ssa.gov) and that if you're further off you'll get less, but not nothing.

Stay tuned to Today, NBC Nightly News, MSNBC and CNBC all this week for more on “Retirement: Start thinking now.”

Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Her latest book, "Pay It Down: From Debt to Wealth on $10 a Day," is now in bookstores. Copyright ©2005. For more information, go to her Web site, www.JeanChatzky.com.