This article is part of the “Save More Series,” which comprises of 4 articles. Read part 1, part 2, and part 4 for more information.

I’m sure you’ve heard that you need to save money for retirement. You might wonder how you are supposed to do that while struggling to pay the bills every month. Maybe you dutifully set aside 5 or 10 percent of your paycheck every month into a retirement account, or you might contribute to an IRA every tax season. You see the pile of cash grow, then shrink, and then grow. This is the meaning and purpose of a nest egg. But you wonder: are you saving enough?

What Is Enough?

You may ask yourself these questions: why are you throwing all this money into these accounts? Should you be adding more? Less? Doing it differently? These questions are difficult to answer, and they are very personal. But we’ll try to send you in the right direction in this article.

For starters, how much should you save? You might have heard people throw out big numbers, like $1 million – or even $2 million. And you might have seen television ads from financial firms suggesting very specific numbers for characters featured in the ad. In truth, there are so many variables that no one else can tell you what your “nest egg” should be.

Savings for Different Goals

Strictly speaking, a nest egg can be any amount of money you are setting aside for some later purpose: a dream vacation, a new car, or a summer home.  But generally, when people mention their “nest egg”, the image that comes to mind – a bird’s nest, comfortably housing a yet-to-be-born baby chick – is the right one. When people refer to a “nest egg”, they are usually talking about the pile of money set aside so that their retirement years can be comfortable. Therefore, asking “what’s your nest egg?” is the equivalent of asking “what’s the amount you need for retirement?”

Planning Ahead

Let’s back up for a moment: how will you pay for retirement? For most people, the answer is a combination of income streams and slow withdrawals from nest egg cash. While young adults today are reasonably worried about the future of Social Security, monthly checks from Uncle Sam’s retirement plan remain an important source of income for now, so let’s start there. Some other possible revenue streams include rental property income, and for a dwindling few, defined benefit pensions from former employers.

Before you can begin to think about the nest egg you’ll need to save, you need to estimate what other financial resources you’ll have in retirement. What will your monthly Social Security checks be? The Social Security Administration has a good estimator tool for that. Log in to create a personalized account at SSA, and you can get an even better idea of what your benefits will be based on your actual contributions. Remember, of course, that it’s just an estimate. Your income and contributions may increase or decrease in the future, impacting your benefits. Social Security payments might change. Your monthly benefits will grow – albeit very slowly – over time, thanks to cost-of-living increases.

Time is Money

Once you have that figure, talk to your pension plan manager about what you can expect as a monthly pension check. You’ll have to rough out other income streams like rental income. Also, thanks to the gig economy, many retired people find they enjoy working a bit – and earning some side income – well into their retirement years. That extra cash can help.

Expenses

Now that we’ve talked about your income, let’s figure out the other side of your next-egg calculation: your expenses. This can be even trickier. There’s plenty you don’t know. What if you live to be 95? That’s a 30-year retirement if you quit at 65. You’d need a lot more money than if you die at 85 – and let’s hope that’s the case. What will your medical expenses be? Any big trips do you have planned? What other dreams will you pursue?

Financial advisors have come up with general guidelines to estimate expenses.  Some say you’ll need two-thirds of your retirement-year annual income to maintain your lifestyle in retirement or that you’ll need 80% of your retirement-year spending. But a better way to estimate retirement costs is to do it the old-fashioned way: make a budget. What will you spend on housing? Taxes?  Vacations? Be realistic: do you plan to take month-long cruises? Do you live in a high-property tax state?

Figuring out Your Number (Hint: This Should Be a Range)

Now you should have a good idea of both how much money you’ll need every year and how much you have coming in. For example, if you spend $75,000 and have $45,000 coming in from Social Security and other sources, that’s a $30,000 shortfall – your nest egg will have to cover that amount for 10, 20, or 30 years. So how much is that realistically?

Keeping things simple, many financial advisors will say you can spend only 4% of your nest egg every year to make sure you don’t run out of money. Using the example above (and with help from Bankrate’s retirement calculator) that means withdrawing $30,000 from a nest egg of about $430,000 on year one. If you are a person who’s heard you need at least $1 million to retire, this math should make you feel a bit better.

Calculating Your Savings

Still, the calculations are very imprecise. My math above assumes a whole bunch of things – a 25-year retirement, 2% inflation, and a 7.5% investment return throughout that span. The calculation can run amok in lots of ways. Remember, at least part of your nest egg will remain invested during your retirement. What if the market does really well, and it doubles? Or if it does poorly, and it’s cut in half? What if you live to 100? It also assumes $3,300 worth of Social Security checks and other income streams in every month. Certainly reasonable, but certainly not guaranteed.

Knowing your Goals

The further you are from retirement, the more imprecise these calculations become. If you are young and nowhere near retirement, this exercise might seem very intangible to you. Still, it’s really important to have a goal and stick to it. That’s why financial advisors have tried, sometimes awkwardly, to come up with guidelines like that $1 million figure.

Jean Chatzky, author of multiple financial books, recently offered up this set of guides: by 30, you should have your annual salary saved for retirement; at 40, three times your annual salary; by 50, six times; and at 60, eight times. She received a lot of outrage from young people who feel they can’t save for retirement while paying off student loans and trying to save for a mortgage, but that’s misguided. Saving for retirement is equally as important as paying off student loans. Goals are simply guidelines to get you started.

The “Splits” Method: A Good Starting Point

Another model I developed a few years ago involves “hitting your splits.” Like all financial goals, it’s just a guide, but you might find it useful. To happily land somewhere between $1 million and $2 million in retirement, you’ve got to start reasonably early and double your money every seven years. Like this:

30$50,000
37$100,000
44$200,000
51$400,000
58$800,000
65$1.6 million

Using a combination of fresh investment and market returns, this isn’t as hard as it sounds. Many investors have heard the rule of 72 – money earning 7.2% returns will double every 10 years, and the reverse is also approximately true: money earning 10% will double every 7.2 years. Again, using rough math, some combination of stock market returns and new cash adds up to 10% increases, meaning the $50,000 you have saved by age 30 will be worth $100,000 by age 37. And so it goes. In reality, as the numbers get larger, our young investor will run into contribution limits for tax-advantaged accounts, and other variables also make these assumptions imprecise. But the basics are still true. Starting with $50,000 at age 30, an investor who puts aside $150 per month and enjoys typical market returns will see their money double by age 37 to around $100,000.

The key is to be headed in the right direction towards your nest egg goal. Using the same rough criteria and aiming for a nest egg of $1 million, someone who doesn’t start until age 37 ends up with only $800,000 at age 65, putting them in danger territory for retirement. The most important takeaway: when it comes to a nest egg, you just can’t make up for lost time, so remember to start early.

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