I’ve had several conversations in the past month with people who are wondering how much to save for retirement. They’re worried they won’t have enough. (And the recent market turmoil only makes matters worse.)

The problem is that nobody seems to agree on what assumptions to make when planning for retirement. How much should you assume for inflation? For investment returns? For rising health-care costs? How long should you expect to live?

Conventional wisdom
Most retirement calculators base their projections on your current annual income. They use your income as a frame of reference, as a starting point for other calculations. Many financial planners will suggest that you need 80% (or 70% or 100%) of your pre-retirement income to maintain your lifestyle.

But does this really make sense?

What if your income is $50,000 a year and you’re currently spending $75,000 a year? In this case, your income understates your lifestyle. You need far more than 80% of your current income to maintain your lifestyle — and that’s before you’re retired! What if your income is $150,000 a year and you’re only spending $30,000 a year? In this case, your income overstates your lifestyle, and in a big way.

Unconventional wisdom
It seems to me — and remember, I’m not a financial expert — that it makes more sense to base your financial needs at retirement on your current spending, not your income. Your spending reflects your lifestyle; your income does not.

Money magazine’s “undercover financial planner” seems to agree. The Mole writes:

My advice is to figure out what you think you will spend in retirement based on your specific needs and desires. Once you have this amount, add 10 percent to it, because we always seem to have these unexpected expenses that come up.

This is another reason to value frugality. If you can live a lifestyle that is comfortable but not extravagant, you will effectively decrease the amount you need to save for retirement. Because I’ve embraced thrift, my spending has dropped. I feel like I now need to save less for retirement than I would have if I were still living the same lifestyle I had five years ago.

Running the numbers
Not every retirement calculator derives its numbers from pre-retirement income. During my research, I found several tools that let users project retirement needs based on other factors, including expenses. Some of these calculators are simple; others are more complex:

My favorite calculator, however, combines simplicity and complexity. FIRECalc 3.0 may seem overwhelming at first (there’s a lot of text to read there), but it’s actually fairly elegant. It asks for how much you have saved, how much you’ll spend every year, and how many years you expect to live. Then, using historical data, it produces a graph to show you how likely your planning is to succeed:

FIRECalc shows you the results of every starting point, since 1871. You can get a sense of just how safe or risky your retirement plan is, based on how it would have withstood every market condition we have ever faced.

If you want to make the FIRECalc model more complex, you can. But it’s possible to have fun with it — and to learn a lot — by just using the basic data fields on the main page.

“How much should I save for retirement?” is a complex question. There’s no magic answer because nobody can see the future. All you can do is make your best guess while taking into account historical rates of inflation and investment returns, future health-care costs, and your estimated life expectancy.

Have you attempted to calculate your retirement number? What method did you use and why? If you’re close to (or actually in) retirement, I’d love to hear your advice. How should those of us in the planning stages proceed?

Addendum: A PR person for Scottrade just contacted me to promote their retirement calculator. I actually think this one’s pretty good, too.

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