How Much Do You Need to Retire?

The question of how much money you'll need to retire is one of the biggest financial topics you'll ever address in your life. It's a simple question to ask, but the answer depends heavily on several factors, not all of which are entirely under your control. Key factors include:

How long you will live
When you plan to retire
What you plan to do with your time
What sources of income or other lifestyle support you will have
Where you live in retirement
How well your health will hold up

What if you have nothing saved at all?

Even with nothing saved, most American retirees will receive something from Social Security, and the average benefit is enough for a very basic lifestyle in a reasonable cost of living part of the country. The average benefit to a retired worker as of May 2016 was $1,347.59 per month. In addition, the average benefit to a retiree's spouse was $698.59 per month.

Those average benefits translate to $16,171.08 per year for an individual or $24,554.16 for a married couple retiring on one spouse's earnings record. The Federal Poverty Level guidelines for 2016 put poverty level income at $11,880 per year for an individual or $16,020 per year for a couple. So if you're able to keep your costs near that poverty level of spending, it may very well be possible to retire with nothing more than the typical Social Security benefit.

In addition, Social Security benefits increase in line with the overall inflation rate. As long as the income needed to stay ahead of the poverty level doesn't grow faster than inflation, it's feasible for a Social Security dependent retiree's income to stay ahead of the poverty level for the rest of his or her life.

While that news may make it tempting to think that Social Security can provide you with sufficient income to cover your costs, reality is not quite that appealing. There are a few huge watchouts in relying on Social Security for your sole source of income.

For one, Social Security's Trust Funds are expected to run out of money within the next 18 years. If nothing changes, that will cut benefits by about 21% immediately and by as much as 26% over time. While planned Social Security benefits might keep the typical retiree reasonably above the poverty level, the risk of those reduced benefits will make it much tighter.

For another, retirees typically face higher healthcare costs than their younger counterparts, and healthcare costs frequently rise faster than the overall inflation rate. As a result a Social Security-only income that may have covered your costs early in your retirement may not truly cover your full costs, including healthcare, later in your retirement.

For yet another, relying on Social Security alone leaves you with no buffer from your savings or investments to handle the unexpected curveballs life sends your way. Those curveballs don't stop just because you've stopped drawing a paycheck, and having money available to handle them is a critical part of assuring small problems don't spiral into bigger ones.

A more comfortable target for your retirement savings

While Social Security can provide you a baseline income and buffer against abject poverty, it won't be enough to provide you with a comfortable lifestyle all by itself. To cover the gaps that Social Security won't, you'll need income from another source, such as a pension, a retirement job, or from your investments.

While your personal needs will be determined in large part by those key factors listed at the top of this article, a great starting point for your plan is something known as the 4% rule. Under that guideline, if you start with a well-diversified portfolio and keep it diversified throughout your retirement, you can:

Withdraw 4% of the value of your portfolio in the first year of your retirement
Increase your withdrawals by the rate of inflation every year throughout your retirement
Have a very strong chance of not running out of money in a retirement that lasts 30 years

Flip that on its head, and it means you'll need to have 25 times what you need your portfolio to cover in your first year of retirement socked away by the time you retire. You can factor in money you expect to receive from Social Security and/or a pension in determining how much your portfolio will need to cover, but be sure to account for inflation if your pension income doesn't adjust for it.

Assume you can expect $15,000 per year from Social Security (which adjusts for inflation), get no pension, and need a total of $40,000 per year to cover your retirement costs. Your portfolio would need to cover $25,000 in your first year of retirement. To cover your expected retirement spending needs via the 4% rule, you'd need $625,000 -- 25 times $25,000 -- saved by the time you retire.

If you have a pension that does adjusts for inflation, simply add that to the amount to your expected Social Security benefit, and your required savings nest egg is that much less. For instance, if you expect a $10,000 pension that adjusts for inflation on top of $15,000 in Social Security, and you still have a $40,000 expected lifestyle, then your savings will need to cover $15,000 per year. In that case, to be covered by the 4% rule, you'd need $375,000 -- 25 times $15,000 -- saved by the time you retire.

What if your pension does not adjust for inflation?

If you have a pension that does not adjust for inflation, the math gets more complicated. One estimate to get in the ballpark is to presume half your expected pension income in your spending needs calculation. Use the other half to invest for later in your retirement when you need more to offset inflation.

For instance, assume you have $15,000 in Social Security and a $10,000 pension that does not adjust for inflation, and that you expect to spend $40,000 per year to cover your lifestyle. Your Social Security and half your pension adds up to $20,000 per year, which means your savings would have to cover the other $20,000. To be covered by the 4% rule, you'd need $500,000 -- 25 times $20,000 -- saved by the time you retire.

In your first year of retirement, you'd technically be working from an income base of $45,000 -- $20,000 from 4% of your portfolio, $15,000 from Social Security, and $10,000 from your pension. That extra $5,000 -- and the $125,000 in your portfolio above and beyond what you would have needed save if your pension did adjust for inflation -- continues to compound on your behalf. That way, later in your retirement as your pension covers less of your expenses, your portfolio can pick up the slack.

Start saving now for a better tomorrow

If those targets seem aggressive given your current age and time left until you plan to retire, there's still hope. If you're willing and able to work a few more years, your money has more time to compound and it will need to cover your costs for fewer years. That lowers the amount you need to save to still wind up comfortable in your retirement. In addition, with a typical Social Security benefit keeping a person above the poverty level, you're very likely to not starve even if you don't quite reach your target.

Regardless of your personal savings target or how much time you have left until you'd like to retire, the sooner you start saving money, the better your chances of building a decent nest egg. So get started today, and know that every penny you sock away will be working on your behalf to help you improve your lifestyle in your golden years.

The article How Much Do I Need to Retire? originally appeared on Fool.com.

Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.