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.”

Why work longer?

Life isn’t necessarily getting cheaper for retirees.

Take housing, for example. There was a time when many seniors burned their mortgages after paying them off. But that milestone may be becoming less familiar. More than 80 percent of seniors age 65 and older own a home. But 26 percent of them are still paying off mortgages with a median debt of $44,000, according to Joint Center for Housing Studies at Harvard.

The upshot: add the debts together, the possibility for a long retirement and the potential for pricey health care costs, and it may well prove best to plan on spending as much tomorrow as you do today, says Bill Baldwin, president of Pillar Financial Advisers in Waltham, Mass.

“We believe it costs at least as much in retirement, if not more,” insists Baldwin. “”No one ever anticipates a step-down in terms of their standard of living. I’ve never heard one person say “I’m willing to lower my standard of living.”

3. Keep inflation in mind

Now you’ll project today’s costs into the future. Don’t panic, It’s not tough to do as most retirement calculators simply let you plug in an inflation rate. Historically, that’s been around 3 percent. But follow the advice of financial advisers and they’ll likely recommend using a slightly higher number.

“I tell people if they want to be really safe use 4 percent,” agrees financial planner Dee Lee, author of several books including “The Complete Idiot’s Guide to Retiring Early.”

4. Think like a nonprofit

Now that you’ve got some idea of what you’ll spend in retirement, you need to look at where the money’s coming from. For most of us, that’s a mix of sources, including personal savings and investments, retirement funds like IRAs or 401(k) plans, a pension if you’re fortunate enough to get one and Social Security. You can quickly look up your estimated benefit at the Social Security Administration Web site.

Combined, you need to have enough cash to pay out what you need per year over time, without your nest egg evaporating in a year or two. Sounds obvious, but what does this really mean?

To help answer that question, Bill Baldwin, president of Pillar Financial Advisers in Waltham, Mass., recommends individuals view their retirement nest egg not as some big pile of money, but as an endowment fund for a big college or other institution.

As you know, endowments are worth a lot of money. But the financial experts running the endowment don’t simply give it away at once. Rather, they need to ensure they’ll always have enough so they can continue to fund good causes (such as scholarships or grants) for years to come. For that reason, endowment funds give away an amount that ensures they can be generous and still continue to grow.

That magic amount is generally no more than 4.6 percent of their assets a year, says Baldwin. Not surprisingly, planners also recommend individuals take out no more than 4 to 5 percent of their nest egg a year.

“Why withdraw that little?” asks Baldwin. “Because there are bad years and there are good years. When you draw from your portfolio, you’re more susceptible to risk. You are trying to endow income for retirement.”

So let’s say you had $600,000 in various savings and investments, not including Social Security. If you take out 5 percent of this pool each year, as Baldwin and others advise, that leaves you $30,000 to spend annually in retirement. Another quick and handy way to do the math is simply multiply what you think you’ll spend a year by 20. That resulting number is the amount you want to shoot for as a nest egg.

5. Fine tune your strategy

If your savings lags behind your spending requirements, take solace in the fact that you can take steps to close the gap and get on track. And you’ll have lots of company. More than half of those who’ve figured out how much they’ll need in retirement have been motivated to contribute more to a retirement plan or make investment changes, according to a study by the Employee Benefits Research Institute.

At this point, many individuals may find that a little guidance can help. A financial planner or adviser can run more sophisticated risk and tax-analysis of your retirement portfolio; help you select the best investments to reach your goal; and meet with you periodically to ensure you’re on track to reach your target.

Groups like the Financial Planning Association have listings of planners in your area and you can find fee-only planners at the National Association of Personal Financial Advisors. These are a good choice if you just want to give your plan occasional reviews and tune-ups, and not hire someone to manage your assets day-to-day.

If all of your assets are in employer-sponsored retirement funds, such as 401(k) plans, it may well be worth checking in with those who run your plan. Today, 31 percent of companies offer services for employees to contact retirement fund investment advisers online or by phone so they can get help picking investments or setting contribution levels to help reach their goals. Twelve percent of companies provide in-person investment advisers to assist employees better manage their retirement funds.

Word-of-mouth recommendations from friends and family may be helpful, too. But no matter how you track down help, make sure the person you tap has experience in retirement planning (as opposed to, say, tax planning). The same advice goes for finding someone who’s used to helping people in a similar situation as yours, says Dee Lee, author of several books including “The Complete Idiot’s Guide to Retiring Early.”

“If you’re a fireman with a 457 plan, you want someone who understands those,” says Lee. “If your brother-in-law is a dentist he may see someone who understands small businesses. Find someone who understands your particular needs.”

There are a slew of online retirement calculators to help you set your savings goal. Take a look at these tools, such as the ones at the American Savings Council Web site.

Are you worried about having enough money to retire someday? Or, do you have a plan of action? Share your story

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