Beginning with your statement, “Planning for retirement can be overwhelming when trying to figure out just how much money you’ll have to live your style of life,” you’re right that everyone’s needs vary (based on expenses now, the type of retirement you wish to have and longevity). This article is designed to help individuals establish the number of dollars they’ll need to retire comfortably, while also offering suggestions on how to achieve that goal.
1) Evaluate your current monthly expenditures
To begin to determine how much income you’ll need in retirement, start by evaluating your monthly expenses now. These will help determine how much income you’ll need to replace in order to continue to afford your standard of living.
Record monthly expenses: Start by recording your monthly expenses so you can see what it takes to support your way of living (housing, utilities, food, transportation, insurance).
Account for inflation: Inflation will probably result in an increase in the price of items you purchase in the future, and therefore you should consider this when establishing future monthly expenses.
Account for discretionary spending: Include entertainment, travel and other non-essential expenses that you would like to include in your retirement spending.
Establishing how much money you spend each month, will allow you to get an idea of how much money you’ll need to fund your retirement.
2) Determine your desired level of income in retirement
You’ll require sufficient income in retirement to pay for all of your essential and discretionary expenses, plus any unexpected expenses that arise.
Calculate necessary income: Establish the income you’d like to earn during retirement. This includes the income you’ll need to cover your essential expenses (food, shelter, health insurance, etc.) and the additional income you’ll need for luxuries (travel, hobbies, etc.).
Healthcare costs: Healthcare insurance premiums and/or medical expenses may increase in retirement, and should be included in your calculations.
Determining how much money you’ll need to fund your retirement, will help you determine how much money you’ll need to earn to fund those needs.
3) Determine how many years you expect to live in retirement and your retirement age
How long you’ll live and when you plan to retire will affect the amount of money you’ll need to fund your retirement. The longer you live, the more money you’ll need to fund your retirement.
Determine your retirement age: Consider when you plan to retire and how many years of income you’ll need to fund your retirement.
Use life expectancy tools: Use life expectancy calculators to determine how long you may live based upon your age, sex and overall health.
The longer you live in retirement, the more money you’ll need to accumulate in savings, particularly if you’re planning to retire before age 65.
4) Identify any other sources of retirement income
In addition to your own savings, there may be other sources of income available to you in retirement, such as Social Security or pensions. Establish the amount of money you anticipate receiving from these sources.
Research Social Security benefits: Research how much you can expect to receive from Social Security, based on your earning history and retirement age.
Research pension/annuity: If you have an employer-sponsored pension or annuity, research how much income you can expect to receive from this source in retirement.
By identifying any outside sources of income, you’ll be able to adjust your savings goals and retirement plans accordingly.
Conclusion
Calculating the amount of money you’ll need for a comfortable retirement requires a multi-step process. It includes establishing your current monthly expenses; determining how much income you desire to earn in retirement; estimating your life expectancy; and establishing any other potential sources of retirement income. When you clearly define your retirement needs and create achievable savings objectives, you’ll be working toward financial security for your future. Saving consistently and starting early will give you the best opportunity to reach your envisioned retirement lifestyle.
