Retirement: What's your magic number?

(Money Magazine) -- Question: Everyone talks about 'the number,' but what does it tell you? -- ROBERT C., Los Gatos, Calif.

Answer: Ah, the number. Books have been written about it. ING has designed an entire ad campaign around it. And an assortment of online calculators will help you figure out yours -- that is, the savings you'll need to amass by the end of your career to generate enough income beyond Social Security and pensions to retire comfortably.

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Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

Ultimate Guide to Retirement

• Getting started
• 401(k)s & company plans
• Investing
• Annuities
• IRAs
• Self-employment plans
• Pensions and benefit plans
• Social Security
• Insurance
• Estate planning
• Living in retirement
• Getting help

But while the obsession with this figure is somewhat useful -- it is good, after all, to have a goal -- there are better ways to determine if you're making progress toward a secure retirement.

To arrive at the number, you estimate how much income you'll need to maintain your standard of living after you retire -- and how long that income must last. So the number for a 55-year-old who earns $150,000 a year, plans to retire at 65 on 80% of his salary, and wants that income to last until age 95 would be $3,136,687, according to ingyournumber.com.

A moving target

But for all the apparent precision, your number is really an estimate -- and a squishy one at that. Your actual target could be much lower if you pay off your mortgage before retiring and your expenses drop significantly. Or it could be higher if you plan to travel a lot in retirement or if you run up steep health care costs. Other factors that will skew your bogey: your investment gains, how long you live, when you retire, and whether you work part-time after retiring.

The further you are from retiring, the more unknowables you face and the bigger the grain of salt you must factor into any estimate. So while it's useful to monitor your progress, your main concern, especially early in your career, should really be saving all you can. As you get older, and as some variables come into sharper focus -- like your health, your intended retirement age, and your projected peak salary -- then it may become easier to settle on a realistic numerical goal.

A better alternative

But your question raises a larger issue: Does it make sense to shoot for a big lump sum? A huge six- or seven-digit target can be intimidating. Besides, many people have a hard time wrapping their minds around big numbers. Behavioral economists warn of "wealth illusion," or the tendency for people to overestimate the sustainable income a large pile of money can generate.

That's why many retirement experts believe, as I do, that you're better off focusing on how much income you'll need -- and whether you're on track to get it. Yes, that's an estimate too, but one you can more easily equate with a lifestyle.

Some 401(k) plans are already helping workers make this shift. Putnam has introduced a Lifetime Income Analysis Tool that allows participants to see how much annual income they're projected to get from their current 401(k) balances, future contributions, company matches, and Social Security -- and how tweaking their contribution rate, retirement age, and stock/bond mix could get them closer to their goal.

You can run similar figures using the Retirement Income Calculator at troweprice.com. While you may learn that you're a bit short of your income target, being a few thousand dollars off that will be less daunting than learning that you're a quarter million shy of your number.