Years ago, the magic number for a retirement savings goal was $1 million. In the last several decades though, a more realistic goal may be $500,000.

Even that will be a struggle considering how low the national savings rate has become. In fact, many people approaching retirement don't even have enough savings for an emergency fund and will have to use credit to buy automobiles and other expensive things including home repairs. Credit will drain savings considerably quicker than cash purchases.

Also see:5 Tips for retirement investors late to the game

So let's look at a $500,000 goal and what that means both in terms of savings to get to that point and what you might be able to spend after retiring. Then we'll come back to the million dollar situation.

Saving before retirement:

Figure 1 shows the monthly savings needed to reach $500,000. It assumes moderate return and inflation turbulence resulting in nominal dollar-cost-averaging (DCA) of 0.5%. Past historical results including the years 1972-1982 had larger percentages. DCA helps those who save regularly because they buy more shares in down markets and less when investments are over-priced.

Figure 1 also assumes that savings increase each year with inflation. The monthly savings are therefore in inflation-adjusted amounts to preserve perspective of the dollar values.

The amount that has to go to retirement savings reduces both with the number of years to save and the real return. Those that wait to save for retirement until later in their life have a much tougher goal to reach.

The real return is very important as well. The real return is the actual return after fees and investment costs minus inflation and minus taxes if in a taxable account. To get higher returns, professionals usually recommend a higher stock allocation percentage before retirement than after. Historically, an allocation of 60% stock and 40% bonds may have produced an average real (inflation-adjusted) return of 5% before any reduction for costs or fees which can reduce returns by 0.5% or less for an index fund investor or well above 2% for load funds and/or professional fees. Returns in taxable accounts will also be reduced by income taxes.

The actual cumulative historical returns depend on the particular years selected from the past and vary widely, especially for a couple of decades that include the deadly 1972-1982 years. Before retiring, the adverse effects of some years with low returns and/or high inflation can be ameliorated by deciding either to work longer or save more.

Those options are not available to a retiree who cannot seek part-time work to supplement savings.

Most people with saving goal of $500,000 would have to save an inflation-adjusted amount near $700 per month for the next 30 years or $1,300 per month for about twenty years. Those who have only about 10 years left to save anything would have to put away roughly $4,000 per month — an impossible amount for most people.

Affordable withdrawals during retirement:

It's important to note, that people should not consider their total assets as savings for normal retirement budgeting. It's necessary to set aside some amount, perhaps 10% of total savings for emergencies. There is no magical number for this reduction. Many will find that family problems or catastrophic losses require seemingly impossible sums that will both reduce lifestyles and may force dependence on relatives, charity or welfare programs. We shouldn't completely ignore unknown future financial surprises, so it's wise to make some allowance for them such as with an arbitrary percent of total savings.

There are other considerations too. If people consider their home or other real estate as part of their retirement savings, they have to realize that real estate is often not easy to sell and may fetch far less than imagined. If buying new automobiles or remodeling is in your future retirement, these are not the kind of normal expenses that most retirement programs consider. They only consider things that require constant inflation-adjusted withdrawals.

Large singular expenses don't fit into that model, so it's prudent to subtract current estimates of large one-time retirement purchases in today's dollar values from total savings before entering retirement savings into a computer program that tells how long your money will last. If retirement savings are mostly in qualified accounts, then enough extra must be added to one-time purchases to cover the taxes due on withdrawals.

In the retirement case results shown in Figure 2, the initial savings of $500,000 assumes that the costs of large singular purchases or provisions for emergencies are not included. The $500,000 is only for normal monthly retirement withdrawals that increase each year with inflation. The results also assume a nominal 0.5% REVERSE-DCA.

Should we experience a repeat of the 1972-1982 economics, reverse-DCA would be much higher. Retirees do just the opposite of savers. They regularly make withdrawals, not deposits. Hence a withdrawal when investments are depressed requires more shares. That's why reverse- DCA reduces returns.

Affordable monthly withdrawals are less when considering longer retirement periods and increase with higher returns. Retirees get more conservative and invest in less stock to reduce volatility and risk. A mix of 40% stock and 60% bonds may produce an average raw return of 7%, but after subtracting inflation, fees, investment costs, applicable income taxes and reverse DCA, the real return is more likely to be in the range of 2%. Many elderly retirees have difficulty getting returns much above inflation and so have 0% real returns.

So, $500,000 of retirement savings (excluding one-time purchases and emergencies) mean affordable monthly withdrawals may be in the ball park of $1,500 to $2,000. It's important to make a new budget plan each year taking into account what has happened to actual returns, inflation and investment balances as well as a new estimate of life-expectancy.

How about that $1 million goal?

Those few who have an adequate COLA pension may not even have to pay attention to such a goal. The same thing may be true for those with substantial fixed pensions if the future has low inflation. Most of the rest may find it impossible to save $500,000 before retirement considering that they have been saving too little for too long.

Simply double the values in Figures 1 and 2 above to get to $1 million results — but instead of focusing on getting $1 million, it's more important for low savers to maximize Social Security and build some emergency savings and savings for anticipated large one-time purchases. Then they can set goals based on what is needed in extra savings either relying on professional advice or use of a comprehensive Internet planning program that also accounts for known large one-time expenses.