Saving for Retirement: Are You as Clueless as Your Fellow Americans?

(MoneyWatch)  As I've told you in my previous post, Can't Retire Yet? Don't Despair, millions of working Americans don't have adequate retirement savings. What's even worse, these same Americans don't even know they don't have enough. This is apparent from reading the 2010 Retirement Confidence Survey that was released last week by the prestigious Employee Benefit Research Institute. This survey is a treasure trove of information on Americans' retirement readiness--or lack thereof--and I'll continue to write about this survey during the next few weeks.

The survey reports that less than half of all workers (46 percent) have tried to calculate how much money they should save by the time they retire so they can live comfortably in retirement. When workers were asked how they determine how much to save for retirement, by far the most frequent answer was "guess" (44 percent of respondents).

These two results explain why the amounts that survey respondents say they need to accumulate for a comfortable retirement are quite low. Twenty-nine percent of workers say they need to save less than $250,000, and another 17 percent say they need from $250,000 to $499,999.

Let's do the math to see why these amounts are likely to be inadequate. Many financial planners and actuaries recommend a drawdown rate of 4 or 5 percent of assets each year for people retiring in their mid-sixties, if you want to generate an income that lasts for your life. So if you have $250,000 in savings, a 5-percent drawdown rate will generate a lifetime annual income of $12,500 per year. With $500,000 in savings, a 5-percent drawdown rate generates a lifetime annual income of $25,000 per year.

What should you be shooting for? For people in their sixties, I consider a $500,000 retirement savings target a bare minimum for a traditional retirement of "not working" and continuing to have a middle-class lifestyle. Some simple math shows why this target makes sense. If you dig around on Social Security's website, you can see that the maximum income a recent age 65 retiree can expect from Social Security is just a little more than $25,000 per year. When you add that amount to the income of $25,000 that could be generated by $500,000 in retirement savings, you have a total annual retirement income of roughly $50,000.

Now you might think this won't exactly make your retirement years "golden," particularly given current personal debt levels and the potential for high medical expenses. And I agree. It's possible, however, that you could make ends meet if you're diligent about managing your living expenses, and if you supplement your retirement income with wages in your early retirement years. But remember that for these calculations, I've used maximum Social Security benefits, and also that most Americans' retirement savings are far short of my minimum savings amount of $500,000.

Note: please don't rely on my $500,000 target savings amount; I'm just using that number to make a point. I strongly encourage everyone to do their own math regarding how much money they need to retire, given their circumstances and desired lifestyle. It's not all that hard to do using online retirement calculators. Look for future posts of mine that will provide more details on how you can figure out what you'll need.