With the median savings in 401K balances of only $111,000 for households between the ages of 55 and 65, the idea of working until you have a million dollars in the bank can be disheartening. While it is easy to say you have not saved enough to retire comfortably, many seniors are finding their options limited. Health issues or disabilities may require you to retire early. Children’s expenses and short sighted living resulted in less being set aside than intended. Market fluctuations and the recession decimated accounts, many of which have never recovered.

Whatever the reason for the shortfall, it does not change the fact that you are getting closer to retirement age with each passing year. Perhaps re-looking at what you actually need for a comfortable retirement and creating a plan may be more valuable than shooting for the million-dollar mark.

Note What Income Must Be Replaced

Will you need to replace 100%, 80%, 75% or less of your current income? This number is the first important variable in determining what you actually need to have in investments when you retire.

This guestimate can be arrived at by considering what costs will be reduced or eliminated when you stop working. Common items might include professional clothes, commuting expenses, lunches out, continuing education or unreimbursed employment expenses.

How will your lifestyle change? Will you have more time for cooking, reducing the cost of food? You will have more time for comparison shopping and in theory will need less. Now add back in the costs of hobbies, travel, and higher insurance premiums.

When evaluating retirement expenses also consider current debts. Will the house be paid off? Will credit card debt, student loans, or other bills be paid off? How long into retirement will these continue?

Once this information is gathered, create an estimated retirement budget and determine how much of your current income you need to replace.

Income Streams That Are Available

Social Security is the first obvious income stream. Calculators to estimate monthly income can be found at http://www.ssa.gov/planners/benefitcalculators.html. Next, look at pensions that will be available. Other income streams might include annuities, rental income or royalties.

The second key calculation is found by taking the estimated annual (or monthly) income you need and subtracting the income streams that have been established during your working career. If the number is negative, you have enough in income streams to cover retirement needs. If the number is positive, this is the amount you need each year, plus inflation, to cover retirement costs. This figure does not consider unexpected expenses, major illnesses, or other life events that can alter your financial needs significantly. The number you arrive at is your retirement income gap.

Calculations to Help Establish Investment Needs

Professional advisers generally use one of three different calculations to determine the amount you must have in investments in which to live comfortably. Based on Social Security life expectancy numbers, you should plan for a minimum of 20 years in retirement. For a couple, there is a better than average chance that one of you will live for 30 years beyond the traditional retirement age. In your calculations you should also consider that the social security income stream will be reduced significantly when one spouse dies.

The 4% rule states that in the first year, you will withdraw 4% of your investment balance. Each year afterwards an adjustment for inflation is added to the 4% to determine withdrawal amounts. This strategy ties what you have saved, with what you are able to live on, in an effort to ensure you do not run out of money. Using this method, you want to save $100,000 for every $400 increment in your income gap. Therefore, if you need an additional $25,000, you need to have $600,000 in investment accounts for retirement.

8 Times Your Ending Salary is another simple calculation that will give you an estimate of retirement income needs. If you earn $100,000 in the year you retire, you need $800,000 in retirement investments. Given that your final salary is an unknown, you can estimate what you expect your salary to be or use your current salary. If you use current income, you would need to increase savings in proportion with your income to reach the correct amount in savings by retirement.

Calculate needs based on income streams. This calculation will take your income gap and multiply it by 25. For example: If your goal is to live off $75,000 per year the first year of retirement, and you have $48,000 in income streams, there is a $27,000 per year gap. Multiple this number by 25 and you need $675,000 in investments to fund retirement.

Ways to Live On Less to Fill the Gap

It’s one thing to see in writing where you are short. It may be quite another to come up with enough in savings to get there. If you are in your 50’s and looking at an average 401K balance of $111,000, determining you need another $500,000 may feel impossible.

Filling the gap can come from reducing required income, increasing savings, and lowering expenses.

Reducing required income can be accomplished most easily by working longer. For every year you are employed, that is one less year you need to fund. Delaying retirement may also increase social security, which raising your income streams, further reducing the gap. Even part time income or income from a hobby will lower what you need to have in savings.

Increase Savings can often be accomplished as children leave the nest. Up your contributions to 20% or 25% and max out IRA contributions. For a household income of $100,000, 25% results in $25,000 being set aside for retirement. In a decade you could set aside $250,000 plus gains, which can potentially double that amount.

Lowering Expenses can happen through spending cuts and debt reduction. This might mean downsizing to a less expensive home or moving to a city with a lower cost of living. Downsizing reduces your income needs and has other benefits like easier upkeep and less demand for cleaning a large space. You may no longer need a 4-bedroom home and 4000 square feet. Perhaps a 2000 square foot 3-bedroom home or even smaller will do. Reducing square footage will generally lower your mortgage payment and maybe even reduce it to zero. This strategy will also reduce utility costs.

A debt reduction plan can also effectively lower the amount required in retirement. For every $10,000 in debt you can save between $200 and $400 in minimum payments depending on the interest rate you are paying. Reducing a $400 a month debt payment can lower your retirement needs by $100,000.

Retirement budgets are individual and very personal. Your needs will be determined by your current financial habits and the ability to make adjustments before you reach full retirement age. Even if you are starting late, take the time to do some rough calculations and set a plan in place. Making a few changes today will be greatly rewarded when retirement arrives.