How Big a Nest Egg?

Question of the week:I've been saving for retirement for some time now, but I really have no idea if it's enough. How can I find out the total amount that I'll need to retire comfortably? --Joplin Mom

Dear Joplin,

You're to be congratulated for trying to arrive at the amount you'll need for retirement. You're definitely in the minority in taking this important first step to securing your future. According to a 2002 survey by the American Savings Education Council, only about one-third of all workers say they have tried to figure the amount they will need for their retirement years.

We recently asked members of the Armchair Millionaire community about how they are calculating this amount. These comments highlight just two of the many variables that need to be taken into account:

Is the house paid for? "We figure that by retirement, our home will be paid off, and we won't be saving for retirement, so we will only need about one-half the income we get now." --Meg H.

Will you have a pension? "It can vary by a tremendous amount depending on if you/spouse will have a pension. If you don't, the amount you will need could exceed $2 million." --Dave H.

There is no fast, easy way to know exactly how much you'll need to retire in style. You need to consider two types of variables: those you can predict with accuracy (such as what you can save now and the annual income you'd like to have during retirement), and those you can only take an educated guess at (like the rate of inflation, the return on your investments both before and during retirement, and how long you'll live).

There are a number of different retirement planning calculators available on the Web for free, and they are also included as part of many personal finance software packages. To varying degrees, these calculators take the variables into account and provide you with an amount that you will need and what you need to save now to reach that goal. I strongly encourage you to run the numbers with several of these calculators.

Here are some sites with retirement planning calculators:

• Money.com
• Quicken.com
• FinancialEngines.com

It's very likely that the amount you arrive at will surprise you. Depending on how much income you'd like to have during retirement, the total amount you'll need could easily exceed a million dollars. But don't let this discourage you. By taking a few common sense steps, you'll put your goal well within reach. My checklist will get you started.

The Armchair Millionaire Checklist for Growing Your Nest Egg

• Start small but think big. Compounding returns on your savings will make a little grow to a lot. For example, by saving just $300 a month, with a nine percent average annual return, you'll end up with a bit over $500,000 in 30 years.

• Minimize your taxes. Every buck you don't have to pay in taxes is another buck for your nest egg. Maximize every tax-advantaged account available to you, including an IRA and 401(k).

• Invest smart. This means buying and holding for the long term, using intelligent asset allocation and minimizing your costs. Index funds are the perfect tools for doing all of this.

• Dollar cost average. Worried about investing at the wrong time? Then invest the same amount every single month, month in and month out. This is called "dollar cost averaging" and over time, it will boost your portfolio's performance, even when the stock market fluctuates.

THE BOTTOM LINE: Saving for retirement is the biggest financial job of your life. Don't take it on without a clear idea of exactly what you want to achieve.