A lot of us are winging it when it comes to estimating our retirement expenses. If you ask most people how much they think they'll need to retire comfortably, they'll probably just throw out a number. The Transamerica Center for Retirement Studies did that recently and found that the median estimate was \$500,000. When asked how they arrived at that conclusion, 39% of men and 54% of women admitted to guessing.

It seems like a reasonable estimate at first glance; half a million dollars is a substantial sum. It's definitely more than most of us spend in a year and more than some of us spend in a decade. But when you actually do the math, you might be surprised at how quickly you could burn through it.

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An average retirement by the numbers

Everyone's retirement is different, therefore everyone will need a different budget. But to get a rough estimate of costs, let's look at averages. We'll use the following information for our calculations:

• The average retirement age is 64.6 for men and 62.3 for women, according to the Center for Retirement Research at Boston College.
• The average man turning 65 this year can expect to live to 84, and the average woman can expect to live to 86.5, according to the Social Security Administration.
• The average annual expenditures for households headed by an adult 65 or older are \$50,860, according to the Bureau of Labor Statistics.

First, let's consider the cost of the average man's retirement based on this data. His retirement will last about 19.4 years. We multiply the \$50,860 in average expenditures by this number of years, but we must also account for inflation. If we assume a 3% annual inflation rate, that leaves us with an estimate of a little over \$1.3 million. He won't have to save all of this on his own because he'll have Social Security to cover some of it and hopefully a 401(k) match. But \$500,000 probably still isn't going to be enough to cover his out-of-pocket costs.

Now let's look at the average woman's retirement. She can expect to enjoy 24.2 years of retirement. Following the same steps above, we end up with a total closer to \$1.8 million. That \$500,000 doesn't look so good anymore, does it?

These are just estimates, and they probably have little bearing on how much you will personally spend in retirement, but they give you a sense of how expensive retirement can be. It's true that overall spending tends to decline as you age, and some people may not spend as much as the average annual estimate above. In that case, you might need less money in retirement.

But it's also possible that the following estimates are too low for you. The Social Security Administration estimates that one in three 65-year-olds today will live past 90, and one in seven will live past 95. If you live that long, you might need 30+ years of retirement savings instead of 20 to 25. And if you develop a serious health problem, your medical bills could drain your savings faster than you anticipated, costing you tens of thousands of dollars per year.

How to create a personalized retirement plan

So how do you figure out how much you actually need for retirement? You'll never be able to know because there are too many variables, but a personalized retirement plan can get you close. You can follow the same steps as above. Start by estimating your life expectancy. Plan for a long life, to be safe with your calculation. Subtract from this the age you plan to retire at to figure out how many years your retirement could last.

You can use your existing expenses as a baseline for estimating your annual retirement expenses, but remember that your life will change between now and then. You might get rid of some expenses, like child care, but others, like healthcare and travel, could increase. Take these shifts into account; as always, figure a little high in case you end up spending more than you planned.

Use a retirement calculator to estimate the total cost of your retirement. Yours might ask for an inflation-rate estimate or it may assume one. If it asks, use 3% per year. It'll also ask about investment rate of return. It's possible to see annual rates of return of 7% or 8%, but use 5% or 6% in your calculations to be conservative -- your retirement plan won't be ruined if your savings don't grow as quickly as planned.

Once you've done all this, your retirement calculator should tell you about how much you'll need in total and how much you must save per month to get there. Subtract from these totals money you expect from Social Security, a pension, or a 401(k) match to figure out what you must save on your own.

To save as much as your calculator recommends, you may need to readjust your budget and cut back on discretionary spending. If you're not able to save as much as your calculator recommends, consider delaying your retirement to reduce your expenses and increase the amount of time you have to save for retirement.

No matter what, you'll always be winging it a little bit when it comes to retirement planning. But some estimates are better than others. Rather than guess, follow the steps above to come up with a custom retirement savings goal.