Figuring out how much you need to save for retirement is really complicated, which is why some people avoid doing it altogether. But even workers with a savings goal may be setting themselves up for disaster if their target isn't high enough. Sadly, recent research from The Transamerica Center for Retirement Studies reveals many are setting their sights too low. 

According to Transamerica's 2020 retirement survey, the median amount workers estimate they'll need to have saved for retirement is $500,000. And while that may seem like a big number, it likely won't be enough for many people once you take into account a few key factors.

Jar full of coins labeled retirement with coins and clock next to it.

Image source: Getty Images.

Why $500,000 may not be enough

When it comes to figuring out if your retirement nest egg is large enough, the first step is to figure out the amount of income it will produce. That depends on your withdrawal rate, but one common rule of thumb is to plan to withdraw 4% of your account balance when you retire and then adjust upwards each year based on inflation.

If you follow that plan, a $500,000 nest egg would give you about $20,000 a year in income. When combined with the average Social Security benefit of $18,036, you'd have enough to cover the basic necessities in most states with just a little left over for travel and enjoying life. 

But that's all based on today's numbers, and there's a big problem with looking at what $500,000 would buy you today: It doesn't take into account the impact of inflation. While half-a-million would enable you to get by today, inflation will rear its ugly head if you aren't retiring for decades. In fact, if your retirement is 20 years away, the inflation-adjusted value of a $500,000 portfolio would be around $271,919. That would give you income equivalent to $10,876 today, so even when combined with Social Security, it wouldn't cover the essentials in many parts of the country. 

There's also a good chance healthcare costs will increase faster than inflation and that taxes will be higher in the future due to mounting government debt. You've got to take into account the impact of these expenses, too. In fact, some estimates suggest that a senior couple retiring in 2019 can already expect to spend $369,900 on out-of-pocket health expenses, including Medicare premiums, deductibles, and copays. Unless things change, that means the bulk of that $500,000 nest egg could be eaten up just by health spending and IRS bills alone. 

What should your retirement savings goal be?

Setting a retirement savings goal isn't as simple as picking a big number. It's essential to think about how much you'll actually need as a retiree.

If you're close to retirement, you can set a budget for yourself and figure out how much money your investment accounts need to produce, then work backwards from there to set a savings goal. This won't work if you're decades away, though, as it can be hard to predict what future spending will be. Fortunately, there are other methods that take inflation into account, such as calculating what your final salary will be by the time you retire (assuming a 2% annual raise) and then figuring you'll need your investment portfolio to produce enough income to replace 80% of that amount. 

You should also consider likely future healthcare spending increases as well as the potential for tax increases, and think about setting your goal a little higher than you'd planned to account for these big expenses. 

Don't leave yourself short of cash as a retiree

When you set an ambitious goal for retirement savings, it can sometimes feel insurmountable. But by sacrificing a little bit now and investing enough for your future, you can build a nest egg that will see you through your senior years. When you can enjoy life as a retiree without financial struggle, you'll be very glad you made the effort.