Planning for retirement can be a daunting prospect if you don't know what you're really saving for. For most of us, pinpointing a retirement number is more of an educated guess than an actual science. There are many factors, like your health, inflation, and your investments' performance, that will eventually come together to dictate how long your savings will last. But if you want to get a good sense of how much to save, here's a three-step plan to help you come up with a reasonably accurate number.


1. Estimate your expenses

In the absence of a crystal ball, it's hard to say exactly how much money you'll need in retirement, so think about the major expenses most seniors face and how they'll play out for you. The first is healthcare, which, unfortunately, may end up being costlier than anticipated. Recent data tells us that the average healthy 65-year-old couple who retired last year will spend $377,000 in lifetime healthcare costs. Now if you're in terrific shape, you might spend less, but if your health is poor, that number could climb. Since that $377,000 projection is meant to roughly span a 23-year retirement, you can use it to estimate your healthcare costs at $1,366 a month per couple, or $683 per person.

The next factor to consider is housing. If you own your home outright and don't have a mortgage, your housing costs might be relatively low, but entering retirement with a mortgage payment hanging over your head is a different story. Also consider that most homeowners spend anywhere from 1% to 4% of their properties' value on annual maintenance and repairs. If you own an aging home worth $300,000, you might spend as much as $1,000 a month on upkeep alone. And don't forget property taxes, which have proven to rise over time.

Transportation is another big expense you might face in retirement, especially if you own a vehicle. AAA says it costs $725 a month on average to own an automobile, and you can't discount the possibility of seeing your auto insurance premiums rise as you age.

Finally, think about how you plan to spend your free time in retirement. If your goal is to garden and bond with your grandkids, your leisure costs should be fairly low. On the other hand, if you hope to travel the world, you'll need a lot more income to finance that sort of lifestyle.

Once you've had a chance to think about what your retirement budget might look like, you can aim to come up with a number that represents your anticipated monthly spending. It may not be perfect, but it's a good starting point.

2. Look at your savings and benefits

After estimating your monthly expenses, your next move is to see how much money you have saved and figure out what you'll get from Social Security. Both pieces of information are relatively easy to come by. For the first, just take a look at your 401(k), IRA, or any other place you're housing your savings. For the second, you can use the Social Security Administration's benefits estimator to see what your monthly payments might look like.

Together, these two figures will give you a sense of how much income to expect in retirement. To see whether it will suffice, however, you'll need to move on to our next and final step.

3. Use the 4% rule

By now, you've ideally figured out how much money you'll have coming in during retirement and how much you'll need to pay your living expenses. From here, you can use the 4% rule to see whether you're set to retire or need to save more.

The 4% rule states that if you withdraw 4% of your savings during your first year of retirement and then adjust all subsequent withdrawals for inflation, there's a very strong chance your savings will last for 30 years. Your goal, in that case, should be to save 25 times more than what you think you'll spend each year in retirement minus your Social Security benefits.

Let's say that after taking a look at your projected living expenses, you think you'll need $5,000 a month, or $60,000 a year, in retirement income. Let's also assume that your estimated Social Security income is $2,000 a month, or $24,000 a year. That means your savings will need to cover $36,000 a year in expenses, in which case you'll need to have amassed 25 times that amount, or $900,000, to be in a secure spot financially. If you happen to already have that much saved, you're in good shape. If not, you'll need to make some compromises, whether it's working a few extra years to increase your savings or rethinking your retirement lifestyle.

Of course, as mentioned earlier, it's almost impossible for most people to predict exactly how much money they'll spend in retirement, so for added protection, err on the side of saving a little more than you think you need. There's really no such thing as having too much money in retirement, and it's a far better scenario than saving too little and coming up short.