1 Determine your needs. The rule of thumb is that you’ll need about 70% to 80% of your pre-retirement income to live on in retirement, depending on your lifestyle. Get a snapshot of your current lifestyle or “bank statement bio.â€ This means looking at the last 12 months of bank statements to identify what you currently spend your money on. Next, separate your spending into categories such as housing, entertainment, and meals. (Programs such as Mint.com will do this for you.) You will have to project what expenses you will no longer have come retirement and which ones will remain the same or increase, notes Anderson.
2 Do the math. While they may differ for everyone, there are three areas that are crucial to determining how much money you will need in retirement:
A: Your current age, current annual income, current take-home pay, and current monthly expenses. Don’t forget about variable costs such as recreation, home improvements, and vehicle repairs.
B: Your goals. What age would you like to retire? How much retirement income would you like to have? Will your current salary be your goal or will a fraction of that amount suffice?
C: Your projected life expectancy. Most calculators assume age 90. If you retire at 65, you may live another 20 or 30 years. Also, take into account what your projected annual pension (if applicable) and expected Social Security payments will be.
For example, a 50-year-old earning $80,000 a year and planning to retire at age 65 will need an estimated $2 million to last them about 30 years in retirement if they plan to live on 70% of their former income. This is in addition to their expected monthly Social Security benefit.
After reviewing each of these areas, write down your anticipated monthly income in retirement that will come from a pension, Social Security, and 401(k)/IRA withdrawals. If this number is close to your current take-home pay, you may be in good shape. But if it isn’t you, have four choices: 1) spend less in retirement; 2) save more money; 3) push back your retirement timeframe; or 4) earn a higher rate of return on your investments. You will need to make up the gap between how much you need to retire and the amount provided by guaranteed sources of income. Don’t forget to account for inflation in your calculations.
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