How much is enough for retirement?

By Bina Brown
For CNN

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(CNN) -- Asking how much capital a person needs to save to generate enough income for a comfortable life in the twilight years is a bit like asking how long is a piece of string.

The answer really is "it depends."

There is no magic figure that people should be aiming for in order to ensure a reasonable lifestyle when they stop working.

Retirement planners often assume that retirees need somewhere between 65 percent and 75 percent of their current income after retirement.

The thinking is that a person could eliminate some work-related expenses (such as commuting and work clothes) once retired.

But not everyone thinks about retirement as quiet time to be spent at home. Many people buy a second home in a warmer climate, or choose this time to travel.

Initially a person's financial needs can be as high as, or even higher than, their current income.

As time marches on and people move into their 80s, they may prefer to stay home. That's when it may seem possible to live on a more modest income. But the biggest unknown cost factor is likely to be health care costs.

Many variables

Health is just one of the variables in retirement planning. Other important factors are longevity; how long a person expects to continue to work and whether he/she intends to rely on any government pension that may be available.

A report released last year by the Organization for Economic Co-operation and Development (OECD) predicted an average life expectancy for men aged 65 in OECD countries of 83.1 years and for women of 86.6 years.

This means that someone considering stopping paid work at age 60 has to save enough money to support themselves for at least 23 years.

With some careful planning, a person would have invested enough savings to build a large enough pool of capital to pay an income, possibly through some form of tax effective pension.

The alternative is to rely wholly or partly on a government pension. If 65 percent of pre-retirement income is considered sufficient for a comfortable retirement, then the pension will almost certainly not be enough.

According to the OECD "Pensions at a Glance" report, the average minimum retirement benefits across OECD countries are equivalent to slightly less than 29 percent of average earnings. Some countries offer just 12 percent, while others provide more than 40 percent of average earnings.

Reasonable standard

The OECD says that in most countries, earnings-related pension arrangements are designed to help older people maintain a reasonable standard of living. For people who have spent a full career on average earnings, the average gross replacement rate of earnings provided by a pension in OECD countries is 57 percent of pre-retirement earnings. But this also varies widely between countries.

The bottom line is that individuals should be the best judge of what a reasonable standard of living is.

Financial planners generally believe that everyone can benefit from estimating how much capital they need to accumulate to generate a long term income stream in retirement.

The calculation requires a number of assumptions, including an estimation of living expenses and the number of years you expect to live.

It is generally empowering for people to get a sense of how much they need. Most people have not thought about it and typically underestimate their capital requirement.

A helpful starting point for working out how much you might need and whether your savings will last, are the calculators now available on most of the Web sites of major financial institutions.

Many securities regulators have also developed retirement based calculators. They include the United States at www.sec.gov; Australia at www.asic.gov.au; and the United Kingdom at fsa.gov.uk.

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