Retirement planning is tough for a lot of reasons, not least of which is that it's hard to predict how much money you're going to need decades into the future. Perhaps that's why the Transamerica Retirement Survey found that 47% of workers "guessed" about their retirement savings needs.

That's a tough place to be -- uncertainty is incredibly stressful (particularly uncertainty about a decision as big as retirement). Fortunately, with the tools available for savers today, you don't need to rely on guesswork. Here's one approach that can get you some concrete numbers to use for defining your savings goal.

Add up your expenses

How much money you'll need in retirement depends on how much your retirement expenses will be. And your retirement expenses will depend largely on what you plan to do during your retirement. So before you can come up with a reasonable estimate for your retirement savings needs, you need to know what you'll be doing after you retire.

Try this exercise: sit down with a pen and a piece of paper (or a computer and a word processing program) and write down some of the things you'd love to do after you retire. Do you want to travel, or stay at home? Live in your old familiar neighborhood, or move elsewhere for retirement? Go out and hit the town on a regular basis, or socialize with friends and family in your own home? If you have any bucket list items that you plan to put off till retirement (climb Mount Kilimanjaro?), add them in as well. The resulting list should give you a pretty good idea of the kind of expenses you'll be racking up once you retire. For example, someone who intends to spend his retirement going out to fancy restaurants, theater, or nightclubs will spend a lot more on entertainment than someone who plans to invite friends and family over for charades and Twister.

If you're having trouble coming up with concrete numbers for your expenses, start with your current expenses and add or subtract as needed. A retirement expense calculator can make this process somewhat easier.

Confused man staring at blackboard equations

Image source: Getty Images.

Include a safety margin

Once you have what you feel is a fairly accurate list of monthly retirement expenses, total them up and add 10% to the resulting sum. For example, if your total retirement expenses equal $4,000 per month, add another $400 for a new total of $4,400 per month.

Adding in a 10% margin of error helps in two ways. First, if you forgot an important expense or if you later change your mind about what you'll be doing in retirement, this extra 10% will help make up the difference. Second, adding some padding to your budget will give you a way to pay for emergencies and other unexpected, one-time expenses.

Use your income to work out your savings goal

Let's say that you've come up with a retirement income goal of $4,400 per month, which equals $52,800 per year. You can use that income goal to work backwards and identify how much you'll need to have saved in order to produce that much income.

For many years, the agreed-upon safe withdrawal amount for retirement savings accounts was 4% of the total balance per year. However, there's some evidence that 4% may be a bit optimistic depending on what's happening with the market and the economy at the time you retire. To be safe, it's better to assume that you'll be able to take 3.5% of your entire retirement savings balance per year as income. That way, if the markets (and the value of your investments) are down the year you retire, you'll still be able to take enough income to meet your needs without reducing your balances beyond the point of recovery.

To calculate your total retirement savings, then, you take your income goal and divided by 3.5%. In this example, your income goal is $52,800 per year, so your total retirement savings on the day you retire will need to be $1,508,571.40. If that sounds like more than you can manage, there are a couple of things you can do at this point.

Reducing your retirement savings needs

First, you can work your Social Security benefits into your monthly income needs. For example, let's say that your Social Security statement tells you you'll be getting $1,500 per month in benefits after you retire. You'll probably want to take that number with a grain of salt, since a lot can happen between now and the day you claim your benefits to change that number. So to be safe, let's assume you'll actually get $1,200 per month in Social Security benefits. Subtract that from your monthly income need of $4,400 per month and you're left with an income gap of $3,200 per month, or $38,400 per year. Dividing this number by 3.5% results in a total retirement savings goal of $1,097,142.80. That's still pretty high, but at least you've reduced your goal by about $400,000.

Second, you can reduce your retirement income needs by scaling back your retirement expenses. Reducing your expenses by even a relatively small amount can have a dramatic effect on how much money you need to save. For example, let's say that you manage to cut your monthly expenses by $500, which reduces them to $3,500 per month. Add that 10% margin of error and your monthly retirement income goal is now $3,850. Now subtract your estimated Social Security benefits to the tune of $1,200 per month, leaving an income gap $2,650 per month, or $31,800 per year. Divide that number by 3.5% and you get a new retirement savings goal of $908,571.42.

Third, you can add in some other sources of retirement income that don't depend on saving money. For example, you might decide to pick up a part-time job during your first few years of retirement. Let's say that you look at your prospects and figure out you'll be able to earn at least $1,000 per month from the part-time job or side gig of your choice. That means that instead of $2,650 per month in income, you now need only $1,650 per month from your retirement savings, which works out to $19,800 per year. Divide that number by 3.5% and your retirement savings goal is now $565,714.28.

Turning your goal into reality

Coming up with a realistic savings goal is just the first step in retirement planning. Once you have that number, you need to figure out how you're going to hit your goal in time for your planned retirement date. That means making faithful and regular contributions to the retirement savings account of your choice.

The good news is that you won't actually have to save $565,714.28 in order to have that much money in your accounts by the time you retire. The money you contribute will go into investments that will grow substantially over time. Once again, a retirement calculator can come in very handy when you're trying to figure out how much you do need to contribute to hit your stated goal. In this case, if you have nothing saved now and you want to retire in 30 years, the calculator will tell you that you must contribute $5,597 per year (assuming a 7% return per year). That's a monthly contribution of around $466. You can play around with this number by pushing your retirement date into the future or by further reducing your need for income from your savings. The beauty of this approach to retirement planning is that you can come up with a savings goal that's both realistic and achievable.


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