Updated: 1/26/2012 4:13 PM ET.
|By Brent Arends, The Wall Street Journal
Many of us are afraid we won't have enough money -- though we don't know how much that would be. Six easy steps can help you calculate a goal and chart your progress.
Millions of Americans fear retirement.
They fear the unknown. They fear not having enough money to live comfortably. They fear they are going to end up living in poverty and eating cat food, as the cliché goes.
"Americans' confidence in their ability to afford a comfortable retirement has plunged to a new low," says the latest annual Retirement Confidence Survey from the Employee Benefits Research Institute, or EBRI, a respected nonprofit think tank.
For the first time since EBRI began tracking the numbers, less than 50% of workers in the 2011 survey were confident about their ability to retire comfortably. The number "very confident" had halved in a few years, to just 13%. (Are you saving enough for retirement? Check MSN Money's calculator.)
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Meanwhile, the number with no confidence at all had nearly tripled, to 27% -- more than one in four.
A similar number of people questioned whether they would be able to meet even their basic expenses.
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I am convinced that one of the biggest problems is that people don't know how much they'll need. Many don't even know how to start working that out.
According to EBRI, just 42% had even tried to work out how much they'll need. The most popular way of estimating retirement needs is guesswork.
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OK. Here's Retirement 101. If you're totally baffled, try these six simple steps. It's not a plan. But it's something anyone can do in 10 minutes or less, and it will give you a much better idea where you stand -- and what you need to do.
1. Figure out how much income you'll need. This is the first step. This is where you need to start.
What sort of income will you need each year in retirement? What would be comfortable? What would mean real hardship?
Some people will tell you to sit down and draw up an elaborate budget. And maybe that's the perfect solution.
But you could take a shortcut instead. Every experienced financial planner I've spoken to, when pressed, has given the same answer. For most people, the best guess for the income you'll need to live on in retirement comfortably is about the same as the income you need now.
Simple. Easy to remember.
Obviously, a few things will be different in retirement. You'll no longer have to set aside money to save for retirement, for starters. If you expect to pay off your mortgage by then, you'll no longer have to set aside money for that. The same goes for putting kids through college. But once you've eliminated those costs, the best way to calculate the disposable income you'll need in retirement is to look at the disposable income you have now.
Sure, you can make adjustments. You may find you're comfortable with less. (Or you may want more.) But when you are dealing with the unknown, it helps to start with something familiar. In this case, try your current disposable income.
2. Figure out much you will get from outside sources. That means how much you will get from Social Security. It may also mean how much you will get from a pension plan, if you are among the diminishing few who have one.
Social Security is central to most Americans' retirement plans. It is an inflation-protected annuity that will last your lifetime and where the insurer, Uncle Sam, won't run out of cash. (Any jokes about Ben Bernanke and printing presses should be sent, please, to the Federal Reserve, not to me.)
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What does Social Security mean for you? The Social Security Administration posts an online calculator that will help you work out what to expect in benefits. As of 2011, the average retired single worker got $14,000 a year. The average couple: $23,000.
If you are among the shrinking group of people eligible for a pension, you should work out how much you are going to get from that as well. Add that to your expected Social Security benefits.
3. Figure out how much income you will need from your investments. Once you know how much income you'll need (Step 1) and how much you can expect from Social Security and any private pension plan (Step 2), it's easy to work out how much you're going to need from your own investments.
At the risk of stating the blindingly obvious, it's what's left over. Call it the Cat Food Calculation -- the amount of money you are going to need each year so you won't have to share dinner with Tibbles.
That means a married couple that, say, lives on $40,000 a year in disposable income, has no pension and expects Social Security benefits of $23,000 a year is going to need to provide $17,000 a year from its own resources. And so on.