-
Step 1
Take a long look at your current monthly expenses and figure out what they will be once you retire. Start with major expenses like your mortgage and health care expense. Then factor in your ordinary expenses for food, automobile, and utilities. Togther they represent what recurring expenses you have, regardless of your retirement. Then add in “quality of life” expenses like vacations, hobbies, entertainment. These are what will be most affected by your inability to have saved until late in your working life.
-
Step 2
Figure how much income you will have when you retire, given your current financial condition. Begin with adding in your Social Security benefits. If you do not know what they will be, you can easily receive an estimate of benefits from the Social Security Administration. Add to that figure the monthly amount you expect to receive from your retirement account at work, or your IRA if you have one. And if you have managed to accumulate some money that has been invested, add 1/12 of about 5% of that amount to your monthly income. Assume the yield to be 5%, and you add 1/12 of that to your monthly income.
-
Step 3
See where you will stand financially upon retirement by matching your expected monthly expenses and income. If the resulting figure shows you coming up short, you'll have decisions to make including how much more money you will need and at what age you should retire.
-
Step 4
If you determine that a shortfall exists, you'll need to ramp up your savings for retirement immediately. There are only three ways for you to do this: reduce your current expenses, increase your income or turn your assets into true investments. (Of course, you could also hit the lottery!) You may already be in control of your expenses, so the other options become important. You can increase you income, as an example, by asking your current employer for a raise, or by securing a better paying job. And if you have assets that can be converted to cash, put them to work where they will begin to generate income.
