Q&A: How much do you need to save for retirement?

Q: Is there a rule of thumb for how much I'll need for retirement?

A: Yes — several, in fact, which tells you something about the dangers of rules of thumb.

One rule of thumb is that you'll need about eight times your final year's pay when you retire. So if you're making $50,000 a year, you'll need $400,000 to retire, according to Fidelity Investments. The calculation assumes you'll live 25 years in retirement, so this would see a 65-year-old through until 90.

The calculation make several key assumptions: That you'll need about 85% of your final salary in retirement, for example, which means you'll need income of $42,500. It also assumes that you'll get Social Security, which will also reduce the amount you need to tap your savings each month. Typically, you'll need your savings to provide about half your pre-retirement income, says Beth McHugh, vice president of Thought Leadership at Fidelity Investments.

As with all rules of thumb, this one won't be precise for everyone. "It's a starting point," McHugh says. "Ultimately, they have to put a lot more work into it."

If you want a more precise number, you might consider working backward from another rule of thumb, which says that you can withdraw 3% to 5% of your savings in your first year of retirement. (Academics disagree on the precise percentage, because it depends on many other assumptions, such as your rate of return in retirement.) This rule of thumb assumes that you'll invest in a diversified portfolio of stocks, bonds and money market securities, and that you'll increase your withdrawals over time to account for inflation.

Let's say you need $25,000 from your savings to pay your bills each year, and that you'll increase that by the amount of inflation every year. Divide $25,000 by 5%. You'll get $500,000.

The problem with rules of thumb is they simply give you an idea of how much you need. For example, you may not need to give yourself a raise every year for inflation, which can reduce the amount you n! eed to have saved for retirement.

To get the real number, you have to do some serious number-crunching, starting with an estimate of your expenses in retirement. "It's a good reality check to take a look at what you're spending, and whether you can live on less," McHugh says. You can find a number of good online calculators from mutual fund companies, such as Fidelity, Vanguard and T. Rowe Price. And the Ballpark Estimate from the Employee Benefit Research Institute (www.choosetosave.org) is a good starting point, too.

And if you feel lost, ask for help from a professional. Just don't stop saving.