There is a lot of uncertainty associated with planning for retirement, particularly as it relates to determining how much money you will need to support your lifestyle once you have retired. The amount of money required to fund a retirement that you find comfortable will vary depending upon several factors, most notably, the level of your current expenses, your desired lifestyle post-retirement, and your life expectancy. This article will assist individuals with the process of establishing their own retirement needs, and offer suggestions regarding how to achieve their retirement financial objectives.
1) Determine Your Monthly Expenses
Assessing your monthly expenses will allow you to identify the income that you will require to replace your current income during your retirement years.
Steps to consider:
Track your monthly expenses: Identify your monthly living costs (housing, utilities, food, transportation, etc.), and then track your monthly expenses to establish an average monthly expense pattern.
Account for inflation: Inflation will continue to affect the prices of goods and services into the future; therefore, consider accounting for this factor in your current expenses to ensure you adequately account for increased expenses in your retirement years.
Account for discretionary spending: Establish what your non-essential expenses are (travel, entertainment, etc.) that you intend to maintain during your retirement years.
Understanding your monthly expenses will help you make a more accurate assessment of how much you will need to fund your retirement years.
2) Determine Your Desired Retirement Income
During your retirement years, you will require sufficient income to cover your essential and discretionary expenses as well as any unexpected expenses that you may incur. Establish the income that you desire during your retirement years.
Considerations include:
Essential income requirements: Establish how much you will require to fund your basic expenses, i.e., housing, healthcare and food, as well as any other essential expenses.
Additional income for luxuries: Determine how much additional income you will require to fund your non-essential items such as travel, hobbies, etc.
Healthcare costs: Establish the potential healthcare costs you may incur during your retirement years, including the cost of health insurance and medical expenses, which tend to increase dramatically in retirement.
Determining your desired income will enable you to identify how much money you will need to create in order to fund your retirement years.
3) Estimate How Many Years You Will Need to Fund Your Retirement
Your estimated lifespan and planned retirement age will greatly influence how much you will require to fund your retirement. The longer you live, the greater the amount of money you will require to fund your retirement.
Factors to consider:
Planned retirement age: Establish the year you wish to retire and how many years of income you will require to fund your retirement.
Estimated lifespan: Utilize online life expectancy calculators to determine the number of years you may potentially live, based on various factors, including age, sex, and general health.
The lengthier your retirement years, the more you will require to save, especially if you plan to retire earlier.
4) Consider Additional Retirement Income Streams
There may also be other forms of retirement income, aside from your personal savings, such as Social Security or pensions. Establish how much you anticipate each of these alternatives will contribute to your retirement income.
Examples include:
Social Security Benefits: Research how much Social Security income you can anticipate receiving based on your past earnings and the year you elect to retire.
Pensions or Annuities: Evaluate whether your employer provides any pension or annuity options that provide you with a predictable source of retirement income.
When you take all of the above alternative sources of retirement income into consideration, you can revise your projected retirement savings and develop a corresponding revised retirement plan.
Summary
Establishing the amount of money you will need to fund a comfortable retirement requires evaluating your present expenses, determining the income you want to generate in your retirement years, estimating your life expectancy, and identifying the additional retirement income streams available to you. With a thorough understanding of your retirement needs and the development of realistic retirement savings goals, you will be able to begin working toward a financially stable retirement. With the development of a consistent savings plan and early retirement savings, you will have the greatest opportunity to realize the retirement lifestyle you envision.
