Everyone has a different opinion on exactly how much you should save for a stress-free retirement. Even the experts argue over how much you must set aside each year:
A recent Fidelity Investments report says you'll need to retire with eight times your final annual pay, what The Wall Street Journal calls your "magic number."
A Forbes magazine columnist advises saving 15 percent of your take-home pay every year.
Other financial planners recommend multiplying your annual spending by about 25 to arrive at the number you must reach.
With Americans being told so many drastically different ways to calculate how much to save, it's no wonder that so many have simply thrown up their hands decided not to think about it at all. That confusion leads to procrastination and planning paralysis. Only 58 percent of us are saving for retirement, and a startling 30 percent of workers say they have less than $1,000 saved for their golden years.
So if you're stuck -- drowning in a sea of advice that, instead of inspiring you to act, drives you to bury your head in the sand -- let us share an important secret with you...
There Is No 'Magic Number'
There, we've wiped the slate clean. And it's the truth, no disrespect meant for The Wall Street Journal or Fidelity Investments.
The number that will work for me will not work for you. And there are so many variables to adjust before and during retirement, it really doesn't make sense to look at just one hard-set number.
This is not to say that preparing for retirement isn't important -- because it is. But more important than calculating a "magic number" to base your planning and saving around is the act of thinking about and working through the inputs that matter to your retirement specifically.
So here are some questions to reflect on:
1. When do I want to retire? Perhaps you're a freelance writer who can't imagine a life without writing. Or you're a tax accountant who gets a thrill from looking at W-2s. Maybe full retirement isn't a goal of yours. So you may not need to save as much, since paychecks will continue to flow in to you, though perhaps smaller ones. On the other hand, if you would like to retire at 50 and travel the world with your spouse, you'll need to save strictly and live frugally.
2. How much do I spend and how will that change when I retire? Most of your planning should depend on how much you'll need to spend. If you have a mortgage, it may be gone by the time you stop working, so your housing expenses will drop. On the other hand, you'll be older, so medical expenses may rise. Think about where you spend money now and whether you'll need to continue this in retirement. The general rule is that your expenses in retirement will be between 70 percent and 85 percent of what they are pre-retirement, but yours will vary depending on your lifestyle.
3. What variables could change everything? How would an unexpected illness or the death of a spouse alter your plans? Could working for a few more years after your child graduates college (and that tuition bill is gone) add a significant sum to your savings? What would a sustained bear market do to your investments? What about a bull market? As mentioned earlier, nothing is set in stone, so seemingly minor changes could deplete -- or add quite a bit to -- your savings.
4. Am I being honest with myself? If you're 35 and still don't have roughly your annual income saved, let's face it -- you're behind. If you're older yet and still haven't crossed that milestone, you're even more behind. It's nothing to get depressed about. But it does mean you must work doubly hard to spend less and save more to catch up. And let's face it -- it's much easier to adjust your budget to free up a couple of extra thousand dollars in your 30s and 40s than when you hit 60 and are itching to quit.
Don't Forget, Some of This Will Be Supplemented
If you're lucky, you may still have a pension through your employer. So make sure to factor that into your retirement planning.
And for the rest of us, we also can expect Social Security to pick up some of the tab. Unfortunately, the younger you are, the more likely that your Social Secutiry check won't be quite as big as you hope. But for those nearing retirement, there are many ways to increase your payout -- sometimes by more than 70 percent! To continue reading more about this, simply click here for a free report on the topic.
This article was written by Motley Fool analyst Adam J. Wiederman.