Suppose you’ve saved for a few decades in your 401(k) plan and IRA and you’re approaching retirement. How do you know if you’ve saved enough money?

You might have heard you’ll need to save $1.46 million to have a comfortable retirement, based on a recent survey of 4,588 U.S. adults conducted by Northwestern Mutual. The trouble is, the vast majority of pre-retirees have saved much less than that. Will they ever be able to retire?

It turns out that focusing on a “magic” savings number is the wrong way to decide if you can afford to retire. Instead, replace magic thinking with common sense and a little hard work by using the common-sense formula for retirement security:

  • I > E, or income greater than living expenses.

To put this formula into practice, make sure you have enough lifetime retirement income from all sources that is enough to pay your living expenses in retirement. To be safe, build in a margin to protect against surprises.

If you spend the time to balance your living expenses with your income, you should be able to retire with less than $1.46 million in savings. To do this, let’s look at both sides of the above formula.

How Much Will You Spend In Retirement?

Start by listing your regular living expenses that you expect to have in retirement. Don’t forget to include one-time expenses that you pay each year, such as insurance premiums, property taxes, and year-end income taxes.

You’ll want to be sure to consider how your living expenses could change when you retire. For example, your medical expenses and health insurance premiums might increase compared to when you were working. However, your working expenses, such as commuting costs and work clothes, should decrease. And if you have adult children who have launched successfully, your child-related costs could drop significantly.

You’ll also want to identify your “must have” living expenses, which includes your mortgage or rent, utilities, food, medical insurance premiums, and so on. You’ll want to make sure your retirement income can pay for all these expenses.

Also itemize your “nice to have” living expenses, such as travel, hobbies, charitable gifts, and spoiling the children or grandchildren. In theory, you could reduce these expenses if you don’t have enough income.

Once you estimate how much you’ll spend throughout the year, you’ll have a target for the total annual amount of lifetime retirement income that you’ll need.

The next step is to add up all the sources of your retirement income when you retire.

Will You Have Enough Retirement Income?

Select the age at which you’d like to retire, and estimate the amount of lifetime retirement income you’ll have from each of your sources. Common sources of lifetime retirement income include:

  • Social Security
  • Pensions, if you’ve earned a significant benefit
  • Lifetime income from any annuity or insurance product that you have or plan to purchase
  • Systematic withdrawals from retirement savings that are designed to last the rest of your life

All the above sources of retirement income typically increase if you delay your retirement. That’s why it’s important to start with a target retirement age—you can adjust your target retirement date if necessary.

As you’re estimating your retirement income, you could also include income from working during your retirement years, but you’ll need to be very careful if you do that. It’s likely that at some future age, you’ll no longer be able to work and earn income and won’t have that money to rely on. A better approach is to consider any working income as a source that allows you to delay starting any one of the above retirement income sources in order to let it grow.

One challenge with the analysis suggested here is inflation, since it only considers your living expenses and income at the time you retire. To help counter the impacts of future inflation, you’ll want some of your retirement income sources to increase for inflation. Here’s a closer look at whether that’s possible:

  • The Social Security Administration increases benefits each year for the rise in the cost of living, so that’s a great start.
  • Most pensions are fixed in their dollar amounts, so eventually any pension benefit will lose some of its buying power.
  • You can often purchase an annuity or another guaranteed financial product that increases by a fixed percent, such as 2%, 3%, or 4%. Some products might increase for favorable investment experience.
  • When developing a systematic withdrawal method for taking money from your accounts, you can build in future increases to help counter inflation.

What If You Don’t Have Enough Retirement Income?

After finishing these steps, if you don’t have enough retirement income to pay for your living expenses, something’s gotta give. Either you need to postpone your retirement or look for ways to reduce your living expenses, or some of both. You might need to repeat your analysis a few times to find a plan that works for you.

If you have trouble doing the math described in this post, that’s understandable. In this case, you might need a professional advisor to help you. It’s still a good use of your time to understand the basic steps, though, since you’ll then be able to have a more productive conversation with your advisor.

Using the approach summarized here takes more work than relying on a magic savings number to decide when you should retire. However, it’s a much more effective way to build a retirement that’s financially sustainable.