Everyone wants to know how much money they need to save for retirement. When planning, don't forget to account for inflation and fluctuations in investment returns, Hamm says.

Over the last few months, Ive read several articles that center around the idea that people should be saving every possible dime that they can for retirement. For example, Daily Finance recently had an article entitled Forget the 4% Rule: Retirements Common Wisdom Is Obsolete:

The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds we just want simple ways to manage our finances and save a little money.

The theory was simple: If you spent a maximum of 4% per year of your retirement funds, the decline in principle will be slow enough that your money would last as long as you did. Though the percentage seems modest and the reasoning sound, this 4% rule ignores two factors that have become increasingly, glaringly relevant: first, market volatility, which has battered retirement savings over the last decade, and second, inflation, the silent force that erodes purchasing power year after year.

What does that mean?

The other issue with basing your retirement plan on simple rules is that it can lead to complacency. But the idea that you can set it and forget it and everything will be fine is a trap.

There are so many experts telling people different things, that theyre not going to have to worry, DArruda said. A rule means something in writing, something enforceable. But in retirement planning, theres a fluctuating source. You cant take a guarantee.

Lets look at an example case from a reader that Ill call Marvin.

Marvin has $800,000 put away for retirement, mostly in really conservative stuff like bonds and cash. Overall, hes earning about 2% a year on his money. He was bitten by the stock market collapse in 2008 and doesnt want his money in stocks. Marvin wants to retire in ten years, so he wanted to know how much money he should be putting away.

I asked him a few questions. How much does he anticipate spending (in current dollars) per year in retirement? He told me about $50,000. What will his Social Security benefits look like? He estimated around $1,500 a month (adding up to about $18,000 a year).

Read the original here:
Retirement savings: How much is enough?