How much do you really need to save for retirement? The question (and figuring out the answer) can be daunting, ambiguous and difficult to grasp -- especially since no one knows the future.
That's perhaps why less than 50% of people have even tried to calculate how much money they will need in retirement, according to the latest retirement confidence survey from the Employee Benefit Research Institute.
But this doesn't mean we shouldn't try! If you want to retire some day, you need to start planning as early as possible -- and you can always tweak things along the way.
By asking yourself a few important questions and making a few small changes, you will be able to prepare for the future and retire on your own time.
Here are some simple steps you can take to make sure you are on the right track -- or at least find out what changes you might need to make -- in order to ensure you are adequately prepared for retirement.
5 steps to take now
Though it might be intimidating at first, there are some things you can do now to get a rough estimate of what you will need in retirement -- even if there are unknowns.
1. Take a look at your budget.
This step is possibly the most tedious, but if you get through this step, the others will be a breeze!
If you already have a budget, this part will be much easier, since you'll be basing your future spending on your current spending. But if you don't yet have a budget, take your current expenses from the last month and record them, either on paper or an Excel spreadsheet.
For variable expenses, such as an electricity bill, use the average of a year's bills, divided up into 12 months. And for expenses that don't happen every month, such as an auto insurance premium, divide up the amount to determine approximately how much you'd be spending every month.
The great thing is, some expenses, such as a mortgage or other debts such as student loans, should disappear by the time retirement hits. (If you really want to maximize your retirement savings, check out this guide to pay off your debts as quickly as possible -- then use the money you were using to pay debt and save it for retirement!)
2. Figure out how much you'll spend in retirement.
In another column on the spreadsheet, write down what you think your budget will be in retirement, minus paid off debts. But -- be realistic -- there may be fun items you'd like to create a budget for, such as travel, golf, eating out, or ballroom dance lessons. Once you've added these expenses and your monthly bills, you'll have an estimate you can use to plan out what you'll need in retirement.
But, that's not all -- you'll also need to use something called projected spending to calculate your estimated spending in retirement.
How projected spending works
Projected spending multiplies your current income by a certain percentage to determine how much you'd need in retirement. Though this method is not completely accurate, it does give you a good estimate to begin with when you start thinking about your retirement. Most often, the 80% rule is used, which says you should have a goal of replacing 80% of your pre-retirement income -- or your average income you expect to earn 10 years before retirement. (If you haven't the slightest idea, this calculator can help!)
If you'd rather be on the more conservative side when it comes to spending, use the 90% rule -- or, if you think you'll definitely spend much less in retirement, calculate 70% of your pre-retirement income. Adding in social security can move the percentage down more. But keep in mind -- this number is just an estimate to get you started.
The 4% rule
Once you're in retirement and you've got a bunch of money stashed away, you'll want to keep something in mind: The 4% rule. The 4% rule maintains that you can safely withdraw 4% of your retirement savings each year without running out of money.
Here's a sample calculation to put this idea into perspective. Say you have retirement savings of $1 million, and your projected spending has been calculated to be around $3,000 a month. Using the 4% rule, you could safely withdraw $40,000 per year from your retirement account, giving you about $3,333 per month to live on. Since you may also receive other supplemental retirement income such as Social Security or pension payments, you'd be well above the $3,000 per month needed to fund your retirement.
3. Find out if you're on track.
But, how can you know if you're on track now for retirement? If you want to figure out if you're on track now for having the right amount in your retirement account no matter your age, there are several simple ways to get a good idea.
Consider the benchmarks
Many investment firms and financial institutions have done research to determine how much to have saved at a particular age, depending on spending and income.
JPMorgan Asset Management's 2016 Guide to Retirement reports that someone age 40 with an annual household income of $100,000 should have 2.6 times that amount put away for retirement, and by age 60, that multiple should be 7.3.
Fidelity Investments says that investors should have 1x their income at 30, 3x at 40, 7x at 55 and 10x at 67.
According to JP Morgan, someone who is 40 and has a household income of $100,000 should have $260,000 saved, and according to Fidelity, the same individual should have $300,000 saved. Though the numbers vary, benchmarks are good starting points for getting an idea for how much you'll need in retirement.
Use an online retirement calculator
Online retirement calculator can also help you determine how much you'll need for retirement. A good calculator factors in items such as projected inflation, life expectancy and market returns.
Here are several online retirement calculators -- try a couple to see how they compare!
It should be noted that financial advisors caution savers about using benchmarks, calculators and charts as concrete tools for retirement savings.
"The only time they would ever work is if everything else in your life is status quo," said financial planner Cathy Seeber, a partner at Wescott Financial Advisory Group in Philadelphia, to CNBC. "It rarely is."
But, these kinds of tools can help you begin to think about retirement and ask the question, "Am I headed in the right direction?" which is always a good thing.
Sit down with a fee-only financial planner
If you really want to have more peace of mind about your retirement, it's very helpful to sit down with a fee-only financial planner at least once to talk about your retirement. This kind of retirement planner isn't paid on commission -- they are paid to give you the best recommendations. Since there is no one-size-fits-all approach to retirement and every situation is different, a fee only financial planner can help you make the best decisions for your unique situation.
Read more: How to find a fee-only financial planner
4. Create a plan, and if needed, make changes.
After taking a look at everything, create a plan to help you get to your retirement goals. Are you saving enough? Should you curtail some spending? Eliminate debt? What about suggestions from the fee-only financial planner? Even small changes can add up to make a big difference over time. And, if you're just getting started with investing, check out Clark's Investment Guide.
5. Revisit your plan often.
Once you've decided what you're going to do and how you're going to get there, revisit your plan at least yearly to stay on track. As you continue to monitor your finances, you may decide you need to make adjustments as your life changes. But making a point to continually come back to your finances to see where you are will help you see the progress you've made, and keep you on track for the future. This in turn, will help you have peace of mind when it comes to your retirement.