Financial Literacy 2007 - Retirement
A cartoon man in blue unrolling a green percentage sign with an orange background
5 steps for figuring out your 'big number'

How much will retirement cost? If that question stops you in your tracks, you're not alone. Over half of workers have yet to compute how much money they'll need when they quit working. Among them, 77 percent can only "guess" how much will be enough, according to the Employee Benefits Research Institute.

That's a shame because studies show that people who have set retirement goals and saved for their retirements say that their life in retirement is actually better than they expected. You don't need an advanced degree in finances to come up with how much you'll need in retirement. Just follow these five steps to arrive at that magical number.

Calculating your 'big number'
  1. Understand your spending style.
  2. Decide when you want to retire.
  3. Keep inflation in mind.
  4. Think like a nonprofit.
  5. Fine tune your strategy.

1. What's your spending style?

Your first consideration should be taking a look at your expenses. If you've got a budget, you're a step ahead of the game, because at this point you really need to know what you spend on a daily basis. If you don't have a current spending plan, it's time to start tallying numbers, from groceries to entertainment, mortgage or rent, utilities and so forth.

There are a slew of ways to get a handle on these costs. Keep track of bills and receipts for a month or two, or use financial software, such as Quicken, to help. But as you look at the numbers, start thinking about if you'll get by with more or less in the future.

If you're not sure, take a cue from the pros. Financial advisers generally recommend you amass a nest egg that's big enough to get by in retirement on at least 70 percent to 80 percent of your working income. Other experts say it's much safer, and realistic, to plan on spending more, even up to 100 percent of your pre-retirement income.

2. How old will you be when you retire?

How low, or high, you set this number depends on a slew of personal factors. First and foremost is your age of retirement. If you plan on swapping that briefcase for a tennis racket at 60, you may be in for a case of sticker shock. It's not just that you'll likely have two or three decades of retirement, but financial resources may be greatly diminished if you cut out early.

Notably, workers now have to wait longer before they're eligible to receive full Social Security benefits. Those born in 1960 or after will now have to reach age 67 before they're able to recieve full Social Security benefits. If they jump the gun, say at 62, they'll get less for the rest of their lives.

Most other retirement funds, such as 401(k) plans, IRAs or Roth IRAs make you wait before rushing into retirement. That's because you'll generally be subject to a 10 percent penalty on earnings if you tap into them before age 59½.

The sheer cost of retirement, and the fact that many workers want to do something active, are pushing many to think about "downshifting" into retirement rather than jumping in at once.


Three-quarters of baby boomers born between 1946 and 1964 now plan on working part time, extending work or moving into a different career, either because they have to for financial reasons, or because they want to, says Bob Skladany, vice president of research for

"The old model of retiring at 62 and relying on Social Security, savings and a pension is really over," Skladany adds. "The new fourth leg is work."

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