How to Calculate How Much Money You Need To Save For Retirement
Figuring out how much money needed to retire is something people tend to put off until their 30s or 40s. But getting the facts and figures during your 20s gives you hard retirement savings figures for which you can start to plan. A workable formula, according to University Credit Union Home and Finance Family Resource Center, requires estimating your retirement-age income and adding 0.25 percent to it -- to accommodate inflation -- for every post-retirement year.
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Instructions
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Make an educated guess as to your likely income the year of your retirement. For purposes of discussion, we'll choose the figure $60,000.
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Multiply that figure by 1.025 to get the amount you'll need during your first retirement year. For example. Multiplying $60,000 by 1.025 equals $61,500.
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Do the same calculation for each of your planned retirement years. For your second year of retirement, you will, according to this formula, need to multiply $61,500 by 1.025, which equals $63,037.50. Continue this multiplication process for the 15 to 25 years you expect to live after retirement. Add the yearly figures together to reach a grand total.
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Find out what your yearly Social Security amount will be. An annual letter from the Social Security Administration should give you this figure. If you do not receive a yearly letter, contact the SSA for more information. Multiply this amount by your expected number of retirement years.
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Find out what other income, such as pensions, trusts or inheritances will be. Factor in these other income sources, multiply any yearly figures by your expected number of retirement years, and add them to the total Social Security figure.
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Subtract the Social-Security-plus-other-income total from the total amount needed for your projected years of retirement to come up with the amount you need to save.
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Tips & Warnings
Online retirement calculators abound. These calculators allow you to plug in the appropriate figures and arrive at a savings amount almost instantly.
Overestimating your projected earnings can prove disastrous. Protect yourself by performing the calculation with figures lower than what you expect to be earning. For example, if you believe you'll be making $150,000 per year when you retire, perform the calculation twice more, plugging in the figures $100,000 and $125,000 just in case. Underestimating your projection might prove to be better strategy, as it can motivate you to save more.
