Will you really need $2 million to retire?

Tuesday, March 16
Posted 4 p.m. Eastern

Think $1 million will be enough to retire on?

Seven out of 10 registered investment advisers polled by Scottrade say it's not nearly enough. In fact, most of these advisers say Americans need two or three times as much, according to a story on

That's a comical conclusion to reach, particularly in light of the dismal reality of America's financial situation. Two-thirds of American workers (66 percent) have less than $50,000 saved, not including the value of their home or pension plan, according to the 2010 Retirement Confidence Survey, released by the Employee Benefit Research Institute and Mathew Greenwald and Associates.

Roughly one-third (27 percent) of Americans have less than $1,000 in savings. Only about one in 10 (11 percent) have $250,000 or more earmarked for retirement.

Below, a graphic illustration from the survey shows what Americans think they will need for retirement, broken out by household income:

Amount of savings workers think they need for retirement
Source: EBRI/MGA 2010 Retirement Survey

How to do your own assessment

RIAs are overstating America's retirement needs. After all, they're in the business to manage assets -- for a fee, of course. And the more assets they have to manage, the merrier.

On the other hand, I haven't read any news accounts about irate retirees filing lawsuits alleging their financial advisers or brokers caused them to save too much for retirement.

But let's get serious: How much do we really need? An article that ran in the Journal of Financial Planning a few years ago offered guidelines on how much income you need to save, based on how old you are and how much you already have in savings. I discussed it in a Bankrate story called "How to tell if you're on track."

In Chapter 2 of his new book "Storm Proof Your Money," the Wall Street Journal's Brett Arends tells readers how to figure out how much they need. Here are the first three steps:

  1. Figure out your current disposable income. As you work up the numbers, determine if you'll pay off the house (i.e., you'll have fewer expenses) or if you plan to travel during retirement (i.e., you'll have more expenses). The goal is to come up with an annual target retirement income.
  2. Add together the amount you expect to receive each year from Social Security and pension income, if applicable. Subtract this sum from your target retirement income. The result is your retirement income gap.
  3. Multiply the gap by 20 (called the "Rule of 20") to arrive at your savings target.

Arends offers this illustration:

"Let's say you figure you will need 75 percent of your preretirement income to maintain the same standard of living after you retire. And the Social Security Administration says it aims to provide 40 percent of that. If those numbers apply to you, you're going to need to find another 35 percent of your current income from your own savings. The Rule of 20 says that in that case your savings target would be about seven times your preretirement income (or 20 times 35 percent)."

Once you know your savings target, you can subtract your current savings to arrive at a savings gap. A table in Arends' book shows how much you need to save each year to fill that gap, depending on your age. I did not seek permission to run the table here because I encourage you to buy the book. It contains a lot of really useful information and is a good investment.

The upshot

For boomers in their 50s and beyond who haven't begun saving, figuring out retirement needs will be a depressing exercise. They will have to defer a huge percentage of their current income to reach their goal. Still, if they take advantage of catch-up contributions, it can be doable.

The EBRI survey suggests that going through the exercise of running the numbers does give Americans a sense of confidence. According to the report, 25 percent of workers who have done a calculation say they are very confident they will be able to save the money they need for retirement, compared with 11 percent who have not done a calculation.

Of course, their confidence level may not have any bearing on reality. But the good news is that doing the calculation does change people's behaviors. EBRI says 44 percent of workers who calculated a goal amount in 2008 made positive changes to their retirement planning, such as saving or investing more money or changing their investment mix.

On a related subject: If you want to know how to get started with your retirement savings, check out "3 ways to build a secure retirement plan," as well as other stories in Bankrate's 2010 Retirement Guide.

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