Like me, most of you reading this article are busy saving and investing money for retirement. But many of us have not tried to answer a critical question: How much money will we need to fund a comfortable retirement? Anyone not pondering that question is enjoying a false sense of security -- because your money could run out much faster than you think.

First, run the numbers
How much do you think you'll end up with in retirement? Do you have $200,000 socked away now, with retirement 10 years away? If so, and if you add $5,000 per year and earn 8%, on average, you'll end up with a little more than $500,000. That may seem pretty good, but let's take a closer look.

In our Rule Your Retirement newsletter, I learned that in order to have an excellent chance of making your nest egg last, you should conservatively plan to withdraw about 4% of it per year in retirement. In your first year, 4% of $500,000 is $20,000, or $1,667 a month. Will that be enough? I didn't think so.

Nest egglets and ostrich eggs
Ending up with even $500,000 is a remote possibility for many Americans. According to the 2009 Retirement Confidence Survey (RCS), only 75% of Americans are saving at all for their retirement. And how well have the savers been saving? Fully 40% have saved less than $10,000, and 64% have saved less than $50,000. If you think it's just the young adults dragging down the averages, think again: Among those aged 55 or older, about half saved less than $50,000 (and 30% less than $10,000). Yikes.

Many of those folks are in trouble. Even those of us expecting to end up with $500,000 are not guaranteed a comfy retirement; living off of $20,000 for a year doesn't sound so cushy. So flip the question around, and ask yourself what kind of income you want in retirement.

Let's say that you want to live off a $60,000 withdrawal in 20 years. To find out what kind of nest egg you need to grow, let's first adjust that for inflation, which has averaged 3% over long periods. In 20 years, the value of $60,000 today will be $108,000.

Now, if that's your initial 4% withdrawal, you can multiply it by 25 to get your initial nest egg size: $2.7 million! For an egg that big, you might have to recruit an ostrich.

Fear not!
By now, you might be hyperventilating, thinking you're doomed. But you're not. There are lots of things you can do to make your situation much better:

  • Scale back your expectations. You might live well off less than $108,000 a year. Do your own math and see what your numbers are.
  • Try a change of scenery. You could save big bucks by downsizing into a smaller home, or perhaps even moving to a less expensive part of the country. The average single-family home price in many New York City bedroom communities was recently around $400,000, but it was less than $200,000 in Charlotte, Austin, Tallahassee, or Spokane. You can buy homes for less than $100,000 in other states and cities that you might enjoy.
  • Begin saving more aggressively. Remember that hypothetical $200,000, to which you were adding $5,000 each year for 10 years? Bump that annual contribution up to $10,000, and average 10% growth, and you'll end up with $700,000 instead. (Check out your own situation with this calculator.)
  • Work a little longer. Working just two more years might add several thousand dollars to your nest egg. Working seven more years might earn you a million. Working longer also lets you put off drawing down your nest egg, starting Social Security (which can give you a bigger payout), and changing your health-insurance situation.
  • Invest more effectively. Examine your stocks and funds closely, and make sure you have the most confidence in them. You should only be invested in your best ideas.
  • Be tax-smart. If not, you could pay a steep price. But if you play by the rules, any stock or fund growth that takes place in a Roth IRA account can be withdrawn tax-free.

The Roth IRA could be a retirement investor's best friend. Check out how much a Roth could help you save on taxes:


20-Year Average Annual Return

$10,000 Invested 20 Years Ago Becomes

Capital Gains Taxes Saved With IRA*

ExxonMobil (NYSE:XOM)




PotashCorp (NYSE:POT)


$1.3 million


McDonald's (NYSE:MCD)








Johnson & Johnson (NYSE:JNJ)












S&P 500 Index Fund




Source: Yahoo! Finance.
*Assumes 15% long-term capital gains tax rate.

I included an S&P 500 index fund in there, too, because it's one of the easiest ways to invest in stocks. It will outperform most mutual funds, and it'll often average more than 6% returns.

Don't freak out about your retirement. Just take control right now, and start making it better. Figure out how much you'll need to amass, and then make plans to get there. Our Rule Your Retirement newsletter service can help with those plans -- and you can try it free for 30 days.

Longtime Fool contributor Selena Maranjian owns shares of Johnson & Johnson, 3M, and McDonald's. Intel, 3M, and UnitedHealth are Motley Fool Inside Value picks. UnitedHealth is a Motley Fool Stock Advisor recommendation and a Motley Fool holding. Johnson & Johnson is a Motley Fool Income Investor pick. The Fool owns shares of and has written puts on Oracle. Motley Fool Options has recommended buying calls on Intel. The Motley Fool is Fools writing for Fools.