06/18/2013 01:06 pm ET Updated Aug 14, 2013

5 Methods for Setting Retirement Targets

The Bureau of Economic Analysis recently reported that personal savings rates in the United States fell to an average of 2.3 percent in the first quarter of 2013. That's just the latest sign that millions of Americans are heading toward an impoverished old age.

Why do people have so much trouble saving for retirement? One problem is that it is not easy to project how much money you'll need to retire. Here are some potential approaches, along with the issues involved with each:

  1. Income replacement. There's a popular rule of thumb that says you should shoot for saving enough so you can replace 80 percent of your income in retirement (including whatever you get from Social Security and other sources). This is workable enough if you are in a career where you expect your income to be fairly steady over the long-term, and you are living comfortably within your means. However, in many careers, it is very difficult to say what you'll be earning 10, 20, or 30 years down the road. Also, if you've been running up debts to get by, 80 percent of your income probably won't be enough to meet your expenses.
  2. Projected expenses. An alternative to basing your retirement target on income is basing it on what your expenses are likely to be. This is a more pragmatic way of funding retirement, but the chief problems are projecting your lifespan and what inflation will be over that life span. Both of those are central to determining what your total retirement expenses may be.
  3. Maxing out contributions. You could take the approach of simply contributing the maximum allowed by your 401(k) plan and IRA rules. This is an admirable approach, but no guarantee of success. If your saving has lagged in the past, or you have an expensive lifestyle, you might have to supplement those retirement vehicles with some after-tax saving.
  4. Sustainability vs. depletion. A tricky question when determining retirement funding is whether you should save enough to just live off portfolio income or some other portion of your savings, or plan on depleting your savings over your retirement years. Building a sustainable retirement fund is beyond the means of most people -- and it got tougher when savings account interest rates plummeted in recent years. The difficulty with depletion is projecting with any accuracy how many years you are going to live. A realistic compromise might be to take a depletion approach, but base it on a very long life span.
  5. The action-and-reaction approach. Given all the difficulties cited above, perhaps the best approach is to start out by saving as aggressively as you can afford in the beginning, and then adjust to more specific targets as retirement becomes closer. In other words, don't let the lack of a clear target at first prevent you from taking action.

Inflation, savings account interest rates, stock market performance -- these are among the variables that make the future hard to foresee. However, that uncertainty should make you inclined to save more, not less, so you can be better prepared for a wide range of outcomes. After all, difficulty in seeing the future is no excuse for acting as if it will never arrive.

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