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Setting a savings target for your nest egg — say, $500,000, $1 million, or whatever — can be an effective step in preparing for retirement. But it's not nearly enough.

You also need to have a reasonable sense of how much income your nest egg will generate after you retire.

Unfortunately, when researchers recently queried nearly 600 workers as part of a broader survey of American adults for the Wells Fargo/Gallup Investor and Retirement Optimism Index, they found that most of them weren't very good at putting these two crucial pieces of the retirement-planning puzzle together.

The Problem

The researchers started with a simple question: Do you have a specific number in mind for how much money you need to have saved by the time you retire?

Just over half — 53% — answered that they did, with roughly half estimating they'd need $1 million or more and just under a third figuring they'd require $500,000 or less.

So far, so good.

The researchers then dug deeper, asking those who had a savings number in mind to also estimate how much income they could expect to draw from their savings each year in retirement. The number of workers who had a savings target and were also able to come up with an income estimate dropped to roughly 40%.

The Reality Check

Taking the actual savings and income figures each of the workers provided, the pollsters then calculated the real percentage of savings that workers expected to withdraw annually in retirement. That's when things got interesting.

Only about half of the workers who were able to specify both a savings target and an income estimate had what the researchers termed "a somewhat realistic" withdrawal assumption, generously defined as no more than 5% of savings every year. The rest who ventured an income estimate had a far more expansive notion of how much income their nest egg could generate, in many cases estimating they could withdraw 10% or more annually.

In short, only about 20% of all the workers polled had both a savings goal in mind and were able to make "a somewhat realistic" estimate of how much income they could draw from their savings.

People can disagree about what constitutes a reasonable withdrawal rate. Given longer lifespans and low projected investment returns, I'd say an initial withdrawal of 3% to 4% of savings is probably more prudent, assuming you'll want to adjust withdrawals to maintain purchasing power in the face of inflation over a retirement that could last upwards of 30 years.

But whether you put the range at 3% to 4% or expand it to 5%, it seems clear that even among people able to cite a specific savings target and a retirement income estimate, many still have an unrealistic sense of how much spending their nest egg will be able to support.

The Takeaway

There's an important takeaway here for, if not all, then certainly most people still saving and investing for retirement: Namely, for a savings target to be worthwhile, it must be based on a plausible assumption about how much income that target can provide during a long retirement.

You can't just pull a number out of thin air.

But that's just what many people appear to be doing.

According to the Transamerica Center For Retirement Studies' latest annual survey of workers, more than half of workers who had an estimate of how much they'll need for retirement said they arrived at the figure by guessing or that they went with a figure they'd read or heard about somewhere.

One big drawback to winging it is that you can end up with a false sense of security. You may feel good about having a goal and even better if you're making progress toward it.

But if you base your savings regimen on an inflated notion of how much you can draw from your eventual nest egg, you may find yourself forced to ratchet back your standard of living in retirement or face the possibility of depleting your savings prematurely.

But setting a savings target that's too high can also be a problem.

Why? Well, if you save enough to hit that oversized target, it essentially means that money you and your family could have used for other purposes during your career (a nicer home, more family vacations, the kids' education) instead went toward building a larger nest egg than you needed. In other words, you may have lived more frugally than you had to during your working years.

You'll never be able to know exactly how much you should save or what size nest egg you'll need in retirement. There are just too many unknowns — what your investments will earn, what your retirement expenses will be, how long you'll live, etc. — for pinpoint accuracy.

But by going to a tool like T. Rowe Price's Retirement Income Calculator, which you can find along with other useful resources in RealDealRetirement's Tools & Calculators section, or having a financial adviser work up some projections, you can at least come away with a decent sense of where you stand and what you need to do to improve your odds of achieving a secure retirement.

And that's certainly better than winging it, only to discover on the eve of retirement that you've been fooling yourself all along.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question you would like Walter to answer online, send it to him at walter@realdealretirement.com. You can tweet Walter at @RealDealRetire.

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