How much money will you need for retirement? This obviously is very important question, but also a very difficult question to answer. There are many factors and assumptions that go into estimating the income that will be needed in retirement. With so many estimates and assumptions, there is a high probability the estimated number will be incorrect.

This past summer BusinessWeek week ran an article in which Brett Hammond, TIAA-CREF's chief investment strategist, shared an easy way for people to check on their retirement readiness. Here are some of the major points from the article:

• Hammond's calculations start with one of the basic tenets of retirement planning—that people need at least 70% of their pre-retirement income during post-working years.
• If you're 35 and plan to retire at 65, you need 2.1 times your salary to be on track.
• By 45, you had better have 3.6 times.
• At 55, the multiple rises to 5.4 times.
• And by the time you retire, you'll want it to be 7.7 times.
• He assumes a 10% contribution rate, 4% salary growth, a bit ahead of inflation; a 6% return on investments; and a 25-year retirement period to finance.

If your investments are growing at 6% every year and you are withdrawing 4% each year, then you will not run out of money, even with 2% inflation. The problem that I have with such estimates is that market does not move in a straight line. What happens when the market tanks?

Consider 2008 when the S&P 500 lost a third of its value. A retiree will still have bills and thus need to withdraw a certain amount of dollars. This dollar amount is likely fixed, which means it will be more than the 4% estimated. For example, if your living expenses are $40,000/year, you would need a one million dollar portfolio to support it if you limited your withdrawals to 4%. Assuming your portfolio lost 33% in 2008, that would leave you with $667,000 dollars. Taking a flat $40,000 from it would result in a 6% spend rate, more than the 4% maximum many experts cite. Another alternative would be to limit yourself to 4% which would be only $26,680, well below the $40,000 needed.

Once you get behind it is hard to catch up. Let's say you spend the full $40,000 needed to meet your expenses, this leaves you with $627,000. To get back to the one million needed to generate the needed income of $40,000  at 6%, your portfolio would have to grow by 59% in 2009.

To mitigate the risk associated with relying solely on capital appreciation, consider introducing an income component to the equation.