The discussion on how much and individual needs by the time they retire used to be pretty straightforward. With $1 million in savings, at a 5% interest rate, one could be reasonably assured of having $50,000 in annual income by investing in long-term bonds and simply living off the income. With $2 million, an individual could assume a six-figure annual income without having to dip into principal. (For more on how you can achieve these targets, read How To Save More For Your Retirement.)

TUTORIAL: Retirement Plans

Unfortunately, interest rates have been on a steady decline for roughly three decades now. Back in 1980, nominal Treasury Bill rates were roughly 15%, but these days a 30-year Treasury is yielding just over 3%. Lower yields on bonds has made the investing equation in retirement more difficult and was only exacerbated by the credit crisis, which has also served to complicate the manner in which individuals save to have enough to live off in retirement.

Primary Retirement Income
The primary savings vehicle for most Americans these days is through a 401(k) retirement plan. Individuals have traditionally been able to also count on Social Security benefits, but the long-term picture for this savings vehicle is murky at best, so ideally shouldn't be part of the savings equation. Deciding how much to save first requires having a retirement goal in mind, such as an overall savings level or annual income target listed above.

Given these retirement goals, an individual can make an attempt to reverse engineer, or back into a current level of savings. Other important considerations include one's current age, current savings levels and estimated retirement age. Other major inputs consist of estimating market return levels, such as the growth rates of stocks, bond interest rates and inflation rates over the long term. (For more on inflation, check out Combating Retirement's Silent Killer: Inflation.)

As you can see, there are a wide array of inputs that are far from certain. Many websites, including Investopedia, and the non-profit organization AARP, provide retirement calculators to help individuals enter and tweak the key variables to come up with annual savings goals. AARP asks individuals to estimate retirement age, current savings levels and percentages of income saved, and desired spending levels in retirement.

Many Variables
With so many uncertain variables to predict, it does pay to rely on general rules of thumb to consider current savings levels and percentages. For instance, saving 10% of one's annual pre-tax salary is generally considered a very adequate saving percentage. Employers generally match at least a few percent of what their employees contribute, so getting to a double-digit annual percent is usually a relatively easy hurdle for most individuals.

In terms of estimating market returns, real returns on U.S. stocks have averaged around 7% over the past century. Real bond return levels have been much lower at 2%, while returns on short-term funds have been around 1%. Clearly, any asset growth will have to rely on stocks and similarly-risky assets such as venture capital, real estate or private equity.

A rule regarding asset mix is that the percentage an individual should invest in bonds is equal to one's current age. This does allow a gradual progression to living off interest income at retirement, though there is little need for a 20-year-old to have 20% invested in bonds as he or she has many decades to ride out stock market volatility in pursuit of real returns to live better in retirement. (For more, read The Importance Of Diversification.)

The Savings Lifecycle
Using bankrate's 401(k) savings calculator and the inputs above, here is a summary of potential savings levels from when an individual starts working to when he or she reaches retirement. Primary inputs include a modest starting 401(K) balance of $1,000, starting working age of 22, $40,000 starting salary that grows at 3% per year (roughly the projected annual inflation rate), a 10% contribution rate (or initially at $4,000) retirement age of 67, and annual portfolio return of 8% per year. Additionally, an employer match is common, with a projection that it matches half of the first 6% the employee contributes.

With these inputs, including a disciplined contribution rate and steady average market returns for more than four decades, the individual would be sitting pretty at age 66 with a total account balance of nearly $3.1 million. An employer match is a big deal, as without it the ending balance would be more modest at $2.4 million, but still plenty to live off of. With the employer match, the balance would exceed six figures by age 32, surpass a half million by age 46 and pass a cool million by age 53. By age 61, the balance would exceed $2 million.

The Bottom Line
At the end of the day, saving as much as one can and investing it prudently are two conditions generally under the saver's control. This requires living within one's means and either staying current on financial markets or hiring a trusted investment advisor. Staying mindful of investing rules is also helpful, as is a little bit of luck via periods of above-average stock market returns or bond rates, as occurred in the 1980s and through most of the 1990s. (For more on helping you save, check out Saving For Retirement: The Quest For Success.)

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