How to Calculate Retirement Earnings

Keep Accurate Records of Your Work History

Calculating retirement benefits should begin well before your retirement date in order to understand the process and make certain your goals can be met. Retirement planning is meant to inform you how much funding is needed for your expected life span and the cost of the quality of life you wish to live.

Things You'll Need

• Record of Social Security funds
• Record of retirement earnings
• Net worth statement

Instructions

1. Determine what amount of money you will need to live once you're retired. Estimates run from 65% to 75% of your current income. If your home is paid for, estimates drop to the 55% to 75% range. Personal needs vary, so take into account all necessary costs.

2. Determine from the Social Security website an estimate of your potential retirement earnings. Note that the longer you wait to receive earnings, the greater the amount you will receive. Contact Social Security (through their website or by telephone) to receive their determination of your earnings. Ask for the Personal Earnings and Benefits Estimate Statement for your account.

3. Contact your individual retirement account trustee, or review statements or your 401(k), and determine the total amount of cash liquidation value of the account. Remember that distributions can begin as early as age 59 1/2 without penalty, but must begin by age 70 1/2. Penalty rates are 10% of the amount withdrawn. At retirement, you can continue to let monies accrue or ask for a lump sum payment. Estimate an annual income from these monies.

4. Use the human resources department of your employer to give an estimate of the value of your retirement account today and its estimated value at retirement date. Use the estimate of your retirement value and multiply it by 5% per year until retirement as a conservative estimate of its value. Make certain the employer has fully funded the account.

5. Add any personal savings you have accumulated that you intend to use for retirement. Decide if you need to use the principal portion for retirement, or if you are content to invest the personal savings and use the proceeds.

6. Add the calculations from steps two, three, four and five to find the gross amount of earnings available to you. Estimate a rate of return that these earnings will likely grow in the future. Add this amount to the annual earnings calculations. Estimate your state, local and federal taxes on the total amount of withdrawals. Subtract this from the annual estimate of earnings.

7. Take the result from step six and subtract the cost of living determined in step one. The result is the surplus or gap in savings that have to be made up through delayed retirement, part-time work or continued employment.

Tips & Warnings

• Understand that the failure to save enough for retirement will cause you to either work longer or work part-time.

• Social Security payments are directly affected by how much outside earnings you derive. Be aware of these additional taxes.

References

• Online Retirement Calculator

Resources

• Social Security Information