Calculating retirement

It’s hard to plan and save for your retirement when you don’t know how much money you’ll need. A million dollars is often suggested, but many of us need less — or more.

The following calculation can help you arrive at a rough estimate of your needs: If you think you’ll need $50,000 per year in retirement and you expect to get $20,000 of that from Social Security, you’ll need another $30,000 in annual income. The 4% rule suggests withdrawing 4% of your nest egg in your first year of retirement and then adjusting for inflation in subsequent years, in order to give your funds a good chance of lasting 30 years. To see what $30,000 is 4% of, multiply it by 25. You’ll get $750,000.

If that seems way more than you can possibly save, then consider planning a retirement full of less-expensive activities, such as reading, gardening, volunteering and playing tennis, instead of costlier activities, such as world traveling.

Know, though, that with enough time and determination, you may be able to save a lot of money. There are many things you can do right now to position yourself for a sweeter future:

• Save and invest more. Try saving 15% or more of your income.

• Work for a few more years. That lets you save more and shortens the period in which you’ll have to support yourself with your investments.

• Invest more effectively. The money you won’t need for five or 10 years is likely to grow fastest in the stock market, which you can access via a simple, low-fee index fund, such as one that tracks the S&P 500 index.

• Make the most of 401(k) accounts and IRAS. Money that grows in a Roth IRA or Roth 401(k) can eventually be withdrawn tax-free, if you follow the rules.

There’s more to learn and think about regarding retirement. For clear and concise retirement advice, try our “Rule Your Retirement” service at Fool.com/services.