I wrote a column back in April about the distressing findings on retirement and confidence, compiled by the Employee Benefits Research Council, explaining how ill-prepared most people are when it comes to this generation's biggest financial challenge. To cite just one example: Nearly half of the workers surveyed had less than $25,000 in total savings and investments.

So you can imagine how reassuring it was to talk recently with a 40-something woman who had been extremely diligent about saving and investing. “My husband and I figure we'll have about $1 million when we retire,” she told me with justifiable pride. “We're set!”

I congratulated her, of course. A million bucks is a lot of money, and she and her husband should be proud of their zeal for saving and investing. But I also felt a bit uneasy, knowing that even a sum like $1 million does not guarantee a comfortable retirement.

Obviously, the amount of money you'll need for retirement depends on a host of factors: What type of lifestyle do you need or want when you leave the work force? Are you expecting other sources of income like a pension, Social Security, or perhaps an inheritance? The answers to these questions will vary widely, but I used a handy rule of thumb to do a simple calculation for the million-dollar couple. In case you're interested in doing the number-crunching yourself, which I heartily advise, here's how it works.

THE 4 PERCENT SOLUTION

I call it the “4 percent solution.” The basic assumption is that for a retirement lasting 30 years, you can reasonably assume to maintain your standard of living and keep pace with inflation as long as you withdraw no more than 4 percent in your first year, with that amount increasing every year for inflation. Flip this around, and you need a retirement portfolio 25 times as large as your first-year withdrawal.

This guideline also assumes that you have an investment mix consisting roughly of 60 percent stocks, 35 percent bonds and 5 percent cash equivalents. There are investment vehicles such as mutual funds that allow you to do this.

An example makes it clearer. If you were 60 and retiring today with a $1 million nest-egg, you could withdraw $40,000 in year one (4 percent of $1 million) and be confident that you could keep withdrawing the inflation-adjusted equivalent of $40,000 over the next 30 years. Of course, this is not a guarantee because future returns are unknown; some portfolios will grow more, and the lucky retiree might have a higher standard of living or be able to leave money to his or her heirs; others won't.

Now compared to someone who has less than $25,000 saved for retirement, that million-dollar portfolio looks fantastic. But I suspect that most people would guess that $1 million in the bank would translate into something more than $40,000 per year.

START WITH WHAT YOU'LL NEED

Here's my suggestion: work backwards. Start with what you'll need, not with what you'll have. Then you'll know if you have more work to do in terms of savings and investing.

How much will you need? Again, everyone will have a different vision of his or her retirement standard of living, but a conservative estimate is that you'll need roughly the same income you have today. Many people think they'll need less, but that's not particularly realistic — do you want to lower your standard of living?

Next step: Adjust your annual retirement budget for inflation. If you live on $75,000 per year today and plan to retire in 15 years, you'll need about $108,000 annually if inflation averages an annual rate of 2.5 percent.

Let's stick with these numbers as an example. You're going to retire in 2023, and you believe you'll need $108,000 per year to have a comfortable lifestyle. Now subtract your known sources of income, like pensions and Social Security payments; the rest will come from your assets.

And here's where the 4 percent solution is so useful. In this case, if we assume a combined Social Security benefit of $40,000 per year and no other pension, you'd need your portfolio to generate $68,000 ($108,000 minus $40,000). In order to be able to take out $68,000 in year one — and its inflation-adjusted equivalent for the 30 years of your retirement — you'd need a portfolio of $1.7 million.

That's a lot of money, much more than what the woman I spoke with is projecting for her and her husband. Unless you expect a windfall, the only way to amass that kind of wealth is by saving and investing. Start early: Attention 20-somethings who are just entering the work force — start saving as soon as you get that first paycheck, and invest in a way that you can benefit from the potential of compound growth.

What do I mean by this? I mean investing at least a portion of your long-term portfolio in diversified domestic and international equities. Any reputable financial planner can help you find an appropriate mix of investments for your stage in life and financial goals.

It's also important to use tax-advantaged accounts — such as 401(k) plans, Roth IRAs and traditional IRAs — which reduce the drag of taxes on your returns. Remember, also, to take advantage of the catch-up provision when you turn 50.

You can also reduce your retirement capital needs by changing the equation.

If you work longer, by definition you'll have a shorter retirement and give yourself more opportunities to save and invest. And if you delay taking Social Security to at least what the IRS determines to be your “full retirement age,” or possibly even later, you will qualify for a higher benefit.

These are sobering realities to be sure. Here's a couple diligently saving and investing for their future, and even they may find that retirement isn't a slam dunk. No matter what your age, now's a good time to take a look at what you're going to need and how you're going to get there.

If the process is daunting or confusing, get some help from a financial adviser that specializes in retirement. Having a goal makes the journey that much easier.

You can read about the survey at http://www.ebri.org/survey/rcs/2008/.

Carrie Schwab Pomerantz is Chief Strategist, Consumer Education, Charles Schwab & Co., Inc., Member SIPC. You can email Carrie at askcarrie@schwab.com. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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