How to Calculate a Retirement Fund

Retirement planning is a critical part of your financial future. Calculating what you need in a retirement fund to be able to live comfortable after you retire can be a daunting task though.

Contrary to popular opinion, there is more than one way to go about it. Do you want to know more than one way to fund your retirement savings?

Glad you asked. . .

Difficulty: Moderately Easy

Instructions

1. 
    

   DECIDE HOW MUCH YOU WANT TO EARN.
   
   Think of this in terms of your current yearly income. Some people lower their income for retirement simply because they have paid off the house, the car, and all other debt. They plan on living simply and enjoying family and friends close by.
   
   Others decide they want to travel, see the world, or pursue their hobbies full time. If that is you, you will need to consider that in your calculations.
   
   Go ahead, pick a number. You can change it later. 70%, 80%, 100%?

2. ADD 20% FOR CUSHION.
   
   Why? I will give you three reasons: inflation, taxes, and the unexpected. Inflation makes your money worth less. Taxes always go up. If you haven't heard of this next phenomenon, consider yourself warned. People in retirement are regularly forced out of their homes because they are living on a 'fixed income' (that's normal retirement) and the property taxes keep going up. They just can't afford the home they own free and clear any more.
   
   20% allows you six years before you start cutting into your principle due to inflation.

3. 
    

   DIVIDE BY .075 TO GET YOUR RETIREMENT NEST EGG.
   
   This is based on a conservative estimate of what your mass of investment should be able to provide each year without destroying the principle. Some retirement calculators estimate more, some estimate less. In bad markets of course you will lose principle. In good markets you will build principle. The goal is to pick a number you can safely expect it to average out to during your retirement.

4. 
    

   CALCULATE YOUR PROJECTED SAVINGS FOR RETIREMENT.
   
   Retirement planning tools like the one linked in the resource section below, can help you project how much you will have saved by your desired retirement. Simply subtract your projected savings from the nest egg amount you have above, and you will realize the gap between what you are doing and what needs done in your retirement investing.
   
   You should include in your calculations money saved toward retirement in:
   - IRA's
   - Pension plans
   - 401(k) plans
   - Social Security (only if retiring soon)
   - Stocks, bonds, and other investment vehicles

5. 
    

   FILL IN THE RETIREMENT SAVINGS GAP.
   
   There is definitely more than one way to do this. I will move from the more conventional to the more creative:
   
   Conventional:
   - Start setting aside more monthly income now
   - Find ways to reduce retirement costs (eliminate debt, move to a cheaper area, etc)
   - Work a few extra years (this reduces your retirement needs dramatically)
   
   More Creative:
   
   - Redirect money into income earning real estate investments (rental properties)
   - Create residual income by authoring books
   - Write articles online to create monthly income from home
   - Retire to a part time job
   
   Most of the latter options require some level of ongoing effort on your part during retirement. They give you meaningful work to pursue without wearing you out. Even a small part-time job you enjoy can greatly reduced the required retirement savings.

6. 
    

   COUNT ON ENOUGH TO ENJOY LIFE.
   
   You should have some dreams you want to fulfill in your retirement years. You don't want to spend your hard earned retirement turning down the thermostat in the winter and closing the shades in the summer. You want enough funding to be able to travel, visit family, and explore new areas of interest.

Tips & Warnings

• Visit the linked retirement calculator in the resource section below for a detailed, personalized look at your funds.
• If you under plan for retirement you will regret it fifteen years into it. It is better to work one extra year on the front end, then to be out of money when you need medical care.

Resources

• Retirement Calculator

[kittycooks]

on 5/12/2009 There is so much to think about to plan a retirement fund. Diversity of funds and creativity are important! Thanks for sharing.