How much money do you really need to save for retirement?

Ask three different financial advisers the question "How much do I need to save for retirement?" and you will likely get three different answers. But knowing the right answer has a huge impact on how much you need to save now and what type of retirement you will enjoy down the road.

Personal finance experts Ken and Daria Dolan of are here with some straight talk to help you decide how much you really need to save for retirement in order to experience that secure, golden lifestyle that of which we all dream.

How much is enough? Dispelling a dead-wrong myth

The answer is the foundation of all your pre-retirement planning. Yet, a terrifying 44% of Baby Boomers born between 1955 and 1964 don't know how much they need to save in order to maintain their standard of living in retirement. In fact, only 42% of workers have even tried to figure out how much they need to save for retirement, according to the Retirement Confidence Survey.

We want to help you figure out the answer to this critical question. (We even have a simple retirement planning worksheet that will walk you through it step by step.) But first, we want to dispel a commonly-held retirement planning myth that is dead wrong.

Many "experts" say that you will need 70% to 80% of your annual pre-retirement income in retirement. For example, if you made $100,000 a year, you would need to save enough money to have $70,000 to $80,000 a year to live on in retirement. The thinking is that you would have fewer expenses in retirement and therefore would need less money.

This used to be our advice, too, but that old conventional wisdom no longer holds water in today's new reality. If you want to live a worry-free retirement, you must plan as if you will need 100% of your pre-retirement income. Many retirees are finding that their expenses don't actually go down much in retirement. Plus, there are four big costs we can almost guarantee are rising that many people aren't accounting for. So while you might get to cut out some work-related expenses such as commuting, lunch out and dry cleaning costs, those are a drop in the bucket compared to the impact that these factors will have on how much you'll be doling out in other expenses.

Here are the four big cost factors you need to plan for:

Inflation. Since 1992, we have enjoyed an extended period of very low inflation. Perhaps that's why one of the biggest retirement planning mistakes people make is to forget to factor inflation in their retirement planning. Don't make this mistake!

As recently as 1990 we saw 5% inflation, and double-digit inflation in the early 1980s. Once the Federal Reserve stops its aggressive policy measures that are artificially keeping inflation low, we expect inflation to rear its ugly head once again. As you look to the next 10 to 20 years, we recommend that you factor at least a 4% inflation rate into your retirement planning.

A few percentage points difference in the inflation rate may not seem like much at first glance, but it can have a huge impact on how long your savings lasts in retirement. Here's an example: The average nursing home costs about $74,000 a year today. Adjusting for a 3% rate of inflation, it will cost more than $133,000 20 years from now. At a 5% inflation rate, it would cost more than $195,000 a year.

A longer lifetime. The average life expectancy is going up. The good news is that we are living longer. The bad news...many people haven't factored that fact into their retirement planning.

It used to be that you retired at 65 and were lucky if you enjoyed 10 to 15 years in retirement. These days, it's not unreasonable for you to live for another 30 years after you retire. Plan for a long healthy life so that you don't outlive your nest egg.

Health care.
Health care costs have tripled since 2001. Despite the government's attempts at health care reform, we expect health care costs to continue to climb.

Even though you might not have to pay for health insurance through your employer in retirement, you will have to pay for Medicare and Medigap premiums, as well as long-term care expenses.

Taxes. Where do you think Uncle Sam is going to get the money to pay off the massive increase in government spending we have seen? There are already dozens of new state and local taxes popping up -- and federal tax increases are just around the corner.

The Secret to Saving Enough for Retirement Is...

The reason that most people don't figure out how much they really need to save for retirement is because it seems so daunting. But we're here to tell you it doesn't have to be hard. All you really need to focus on is getting these four things right:

Social Security benefits.
The average retiree gets 39% of their income from Social Security benefits. Be sure you get a copy of your Personal Earnings and Benefit Statement, which outlines the amount of benefits you can expect. Once you start receiving those benefits make sure to maximize them. One way is by knowing the right age to start taking Social Security in order to get your full benefits.

Managing expenses. We have been programmed to believe that we will spend less money in retirement. But many retirees are finding that's simply not true. Don't come up short in retirement because you underestimated your expenses.
Will you pay off your mortgage before you retire? If the answer is yes, that can mean a big drop in your expenses. But most other homeowner's costs-insurance, utilities, maintenance; property taxes-often stay the same in retirement. And repair expenses can actually go up as your home ages.

Lifestyle. Do you plan to live a full and active lifestyle? If so, your entertainment and travel costs will likely increase-sometimes quite a bit-in retirement. If you dream of a retirement that includes lots of nights out, travel or opening that wood-working workshop, then you should prepare for higher entertainment and travels costs.

Inflation. We've already covered this one so you are all set!

Rate of return on your investments. Don't fall for the old saw that the stock market returns 10% a year on average. Do you know anyone who has made 10% a year on their investments over a 20 year period? We don't. We suggest factoring in a 6% to 8% annual return at most.

That's not so intimidating now, is it?

Start taking control over your financial future today. Whether you are close to retirement or just starting to save, it's never too late (or too early) to make positive changes that can set you on the path to a financially secure retirement. For more help on the road to retirement, here are simple ways to save more for retirement and the biggest retirement planning mistakes to avoid.
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