Many of us wonder whether we're saving enough money to retire. It's a tough question to answer, though. You’ll hear “$1 million” tossed around, and while that's plenty for some people, it could represent a shortfall for others. The amount of money you need to retire depends on your health, your expenses, and your goals. Let’s break these down.


How's your health?

Your health can play a huge role in how much money you ultimately need to retire comfortably. Of course, in the absence of a crystal ball, it can be tough to predict what health issues you'll encounter as you age, but know this: Your cumulative healthcare costs in retirement are likely to be higher than you think. Recent data shows that the average healthy 65-year-old couple retiring this year should plan on spending $377,000 in out-of-pocket medical costs throughout retirement. That equates to almost $19,000 a year if your retirement lasts for two decades.

And these are the numbers healthy couples are facing. If you have a medical condition that requires extensive monitoring or treatment, your costs might climb even higher. When you think about the amount of money it'll take to retire, consider what your health looks like and plan accordingly.

What will your expenses be?

Your monthly living costs will also play a big role in determining how much money you should aim to save for retirement. And certain major expenses -- namely, housing and transportation -- will especially dictate how much you'll need.

Let's start with housing. You'd think that owning your home outright would improve your financial picture in retirement, as it means not having to make a monthly mortgage payment. But owning a home in retirement can be an expensive prospect, especially considering that most homeowners spend up to 4% of their properties' values each year on maintenance and repairs alone. If you own a home worth $400,000, then you could spend a whopping $16,000 each year on upkeep.

Then there are property taxes, which have historically risen over time, even in periods when home values fall. While owning a home in retirement has its benefits, in many ways it's a riskier prospect than renting. On the other hand, you won't get a tax deduction for renting, whereas owning might come with some tax benefits.

Then there's transportation, which, again, could go both ways. Owning a vehicle costs roughly $8,700 a year, according to AAA, but if your car is aging, then you might pay even more to keep it running. And don't forget that auto insurance companies tends to charge older drivers higher premiums. On the other hand, if your public transportation and taxi fares exceed the cost of owning a car, then you might lose out by giving up your vehicle.

These are all points to consider as you map out your retirement budget and see what expenses you're likely to face. While it's true that there are other spending categories such as utilities and food to account for as well, focusing on the big ones can help you formulate an accurate retirement budget. Remember, too, that in many cases, you'll have a choice as to how much you spend on your primary living expenses, so think about the things you're willing to compromise on if money is an issue.

How will you spend your days?

One final point to contemplate is how you intend to spend your free time in retirement -- because you're going to have a lot of it. Traveling, for example, is a far more expensive hobby than knitting or attending yoga classes at your local community center. And while many seniors hope to travel extensively, an estimated 67% of retirees fail to budget for it in advance. If you really want to come up with an accurate retirement savings number, be honest about your goals and do some research to see how much they're likely to cost you. You might, for example, decide that it's worthwhile to work an extra year or two if that's what it takes to see the world.

Tying it all together

Once you've done some serious thinking about these three issues, you can begin to come up with a number that will afford you the retirement lifestyle you're hoping for. You can then use the 4% rule to see if your savings will suffice in comparison.

The 4% rule states that if you withdraw 4% of your savings during your first year of retirement and adjust subsequent withdrawals for inflation, your savings should last 30 years. This means that if you manage to save 25 times more than what you expect to spend each year in retirement, you're in good shape. So if you determine you'll need $40,000 a year in retirement, your goal should be to amass $1 million before you stop working. While the 4% rule isn't perfect, it's a solid starting point for seeing whether you're set to retire or whether you should really push yourself to work an extra couple of years.

Of course, you never really know what expenses you might encounter once you enter the next stage of your life. You might spend more in retirement than expected, or you might end up spending less. Pinpointing a precise savings target is next to impossible, but if you're honest about your needs, wants, and goals, then you'll already be much closer to the right answer than the average American.