Determining the Size of Your Nest Egg

Whether You Intend to Spend Luxuriously or Squirrel Away Savings, Consider Your Target Standard of Living

"You've got to be very careful if you don't know where you're going," Yogi Berra once said, "because you might not get there."

The great New York Yankees catcher probably wasn't talking about retirement, but his fractured syntax captures a solid truth about the worry and uncertainty facing American workers as they look ahead and try to plan for a secure old age.

With the fading of traditional employer-funded pensions, millions of workers and their families will have to depend on Social Security and whatever money they have been able to accumulate through 401(k)-type retirement plans and their own savings to support them when they stop working. This shift of responsibility for retirement well-being onto individuals and away from their employers looms as one of the most fundamental and perhaps most worrisome changes in the economic lives of Americans since the Great Depression.

It is true, as proponents of do-it-yourself retirement plans such as 401(k) plans and individual retirement accounts argue, that faithful saving and investing over many years can produce a nest egg large enough to support a comfortable old age and perhaps even an inheritance.

But how much is enough? Am I investing properly? Am I on track to reach my goal?

These are key questions facing today's workers, and, as it turns out, even the experts cannot agree on the answers.

The conventional wisdom among academics and others who study retirement is that retirees need 70 to 80 percent of their pre-retirement income to maintain the standard of living they had when they were working. This figure is often used by sellers of mutual funds and other financial products, and is widely cited in the press.

"But the people who write that have never lived through retirement," said Barry Glassman of Cassaday & Co., financial planners and advisers in McLean.

"What do you do when you have time off? The answer is spend money on more stuff. And when you have 52 weeks a year free," he said, "people can spend as much if not more" than when they were working, in the first few years at least.

On the other hand, some economists, such as Laurence J. Kotlikoff of Boston University, argue that Americans are being encouraged, even frightened, by the financial services industry into saving more than they will need. Those who listen to industry advice, these economists argue, may end up either unnecessarily lowering their present standard of living to accumulate wealth for retirement, or abandoning all saving in despair because the amount they are told they need is so large.

The argument is of far more than academic interest to today's workers, many of whom are stretched to pay everyday expenses and have little room to sharply increase their savings. Unfortunately, it is likely to be decades before it becomes clear who is right.

What should workers do in the meantime?