A Rich Retirement: Are you saving enough?

(MoneyWatch) Lately, we've heard a lot in the news about a potential retirement crisis in this country. People just aren't saving enough. So that begs the question: How much are you supposed to save?

Unfortunately, there is no silver bullet for retirement. There is no "magic number." Everyone's formula, so to speak, is dependent on a number of factors like current age, intended retirement age, life expectancy, risk tolerance, inflation and -- most of all -- health. Generally, the savings target for retirees should be between 80 to 90 percent of your pre-retirement income. Statistics show that a healthy retirement savings nest egg is one for which your annual withdrawal is 6 percent or less.

So what does that mean you have to save in real dollars? Again, this depends on your current income and the lifestyle you desire in retirement.

Let's assume you're 30, you earn $50,000 a year, and you want to retire at age 65. You have zero saved so far. You're comfortable living on 80 percent of your pre-retirement pre-tax income when you retire (which is $40,000 per year).

To reach your goal, you'll need to amass a nest egg of $1,563,000 by the time you retire. That may sound like a lot, but remember: 35 years from now, $1.5 million will be worth far less than it is today, thanks to inflation. Also, remember, that money needs to last you for a long, long time -- this example will take you through age 90.

So how do you reach your goal? If you're a 30-year-old with $0 saved who wants to live on today's equivalent of $40,000 per year in retirement, assuming you invest at an 8 percent rate of return, you'll need to save 13.1 percent of your yearly salary, or $545 per month.

That sounds like a lot, but the earlier you start, the less you have to save.

Note that my example doesn't take any Social Security benefits into account. Social Security should be viewed as a supplemental retirement platform -- not your main source of retirement income.

Another important aspect of retirement planning: Know what you own. It is extremely important to gain a true understanding of all of your assets as well as where your income will come from during your retirement years. Take inventory of Social Security benefits, 401(k) plan assets, IRA assets, potential inheritance income, your home value, insurance policies, annuities and other savings and investments.

To figure out your number, take advantage of one of the great retirement calculators online. I recommend the AARP online retirement calculator. It's a simple tool that gives you a quick read on whether your savings will last through your retirement. If the result says you'll run out of money, you can enter a later retirement age or cheaper retirement lifestyle to see how those changes could affect your financial security. Also, what I love about the AARP tool is that it doesn't require you to come up with a lot of your own assumptions -- it will even plug in your projected Social Security benefit for you -- but it does allow you to view and change its default settings, including the rate of return on your savings, your tax rate and your life expectancy.

Have fun playing around with the possibilities. And no matter what your number is, the key is to start saving as soon as you can.

  • Mellody Hobson

    View all articles by Mellody Hobson on CBS MoneyWatch»
    Mellody Hobson is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News and CBSNews.com.