How to Estimate How Much Money You Will Need To Retire

Before crunching any numbers, remember that the quality of your retirement will depend in some ways more on your preparation than on the amount of cash or assets you have. Also, remember that retirement years don’t have to be periods during which you bring in absolutely no income. It is possible to have a graduated retirement to help with your financial goals. Understanding these caveats, let’s look at how best to come up with a solid number for your finances.

Instructions

Difficulty: Easy

Things You’ll Need:

• Calendar tools to keep you on track to meet goals and review progress
• Calculator and software for calculations
• List of all your assets and liabilities, both real and projected, as well as a list of major financial goals
• Financial advisor (optional, but recommended) to double-check your work and suggest improvements

1. Create an estimate of the amount of money you will need during the very first year of your retirement. Account for contributions from pensions, IRAs, 401K plans, and related options. Ideally, you and your spouse should create a plan together.
2. There are two ways to calculate further: one is a conservative method that suggests that you multiply your first year retirement expenses by 20 to 25. The other says multiply that number by 12 to 15.
3. Working backwards, figure out how long it will take you to accrue this amount of money. Remember that your income isn’t your only source of funds. Interest on investments can contribute substantially to your goals.
4. Work with an accountant to set your numbers, or at the very least double-check them. These are the financial figures that will set the tone for the rest of your earning years, so it’s important to get them right.
5. Remember that the number you come up with should be flexible. Your financial picture may change as the years go by. National interest and inflation rates can fluctuate wildly, throwing off your calculations. Having children, coming down with an illness, or coming into unexpected fortune can affect your plans. As you progress through your earning years, check back with your retirement calculations regularly and make adjustments as necessary.
6. If you’re approaching retirement age and your finances seem out of order or unfortunately far from your goals, consider using a graduated retirement program or getting involved in a post-retirement asset building project.

Tips & Warnings

• Keep abreast of rules governing Social Security, Medicaid and Medicare, particularly as you near retirement age.
• Your goals for retirement might change in the future. For instance, you may decide that you want to go on cruises or safaris. As such, it’s good to give yourself head room so you can truly maximize your retirement years.
• Remember that real estate investments can be both assets and liabilities. If you put the bulk of your retirement funding into your home, you could be disappointed by downturns in the market. Diversify your investment components.
• Consulting with a professional retirement planner can be helpful in understanding specifics of your retirement that may be specific to you.
• Despite your best planning efforts, it is possible to run into unexpected financial hardships. Stay healthy and maintain your skills so you can fall back on your own industry as an ultimate safety net.
• Take out insurance against death and disaster, so you don’t leave your spouse unprotected if you (the primary wage earner) can no longer work.
• You should never assume the markets will protect your investments. Just because stocks have trended upwards over the past few decades doesn’t mean they always will. Diversify with various investing types to protect yourself.