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Without this number, you cannot even start planning for retirement

One of the most difficult facts about retirement planning is that you can never do it. Just as today’s retirees can never foresee the pandemic and recession we are currently experiencing, there will be surprises in your senior year, some of which may cost you a lot of money outside your budget.

The key to a successful retirement plan is not to make things completely right, but to get as close as possible based on educated guesses, and make mistakes in overestimating rather than underestimating. If you are still not sure how much money you need to retire, you can follow the steps below.

Pensive woman holding pen and notebook

Image source: Getty Images.

Estimate your retirement time

In order to estimate how long your retirement life will last (and therefore how many years of living expenses you will have to pay), you need to know when you plan to retire and how long you expect to live. You can choose any retirement date, but if you realize that the plan is not feasible after calculating the numbers, you may need to postpone your retirement so you have more time to save.

As for life expectancy, this is a shot in the dark, but you can use your family history and your own lifestyle to provide you with a starting point. You can also try a life expectancy calculator, such as the calculator from the Social Security Administration. There is no harm in adding a little buffer to your estimate, especially if you are a healthy person. I always thought I would live to be at least 90 years old. It may not happen, but I would rather save the extra money and pass it on to my heirs, rather than exceed my own estimates and be unable to pay my expenses.

After obtaining these two pieces of information, calculating the retirement age is very simple, just subtract the selected retirement age from the life expectancy.

Determine how much you spend on retirement each year

Estimating retirement expenses is easier than estimating how long retirement will last because you already have a baseline for spending. You know how much you spend each month now. Otherwise, you can check your bank and credit card statements with no effort. Calculating your annual cost is very simple, just multiply it by 12 and add a little extra to the one-time cost.

Your retirement expenses will not be exactly the same as today’s expenses, because your life may change from time to time. Taking care of your children today may cost you a lot of money, but after retirement, usually this is no longer something most people have to deal with. When you retire, you don’t have to budget for retirement savings.

But other expenses may increase. Retirement usually brings more leisure time. Many people choose to spend this time on their hobbies, but this also brings new expenses. You may also choose to donate more money to make yourself worry about retirement and may have to spend more on health care.

You can use your current expenditure as a benchmark, but you can adjust the upper and lower expenditure categories based on how you think your expenditure changes after retirement.

Estimate funds from other sources

Although pensions are not as common today as they used to be, they still exist. If you have a pension, it will greatly help you pay for your pension, thereby reducing the amount of money you need to save.

Some employers also match the 401(k) contributions of their employees. Assuming you have contributed enough to your 401(k) to win the game first, this can also help you reach your savings goals faster.

Then there is social security. You can determine whether you are eligible by creating my social security account and estimate your monthly benefits. This may not be entirely accurate, as the Social Security Trust Fund is expected to be exhausted by the end of the decade, which could lead to cuts in benefits. But the plan will not disappear, even if you only get 75% of your eligible income based on the current benefit formula, you can still accumulate hundreds of thousands of dollars throughout your life.

Make a note of the funds you expect from the above sources and any other sources of income you expect in retirement, such as income from rental properties. These will help reduce the cost you need to save.

put it together

Once all the conditions are mastered, they must be combined to accurately understand the pension reserve. You cannot just multiply the estimated annual retirement expenses by the number of years of retirement, because you must also account for inflation. Most retirement savings formulas use 3% per year for this, but you can be higher if you want to be conservative.

The retirement calculator may be the easiest way for ordinary people to estimate their retirement needs because it performs a lot of mathematical operations. You only need to fill in the details in the various fields, which include the time you plan to retire, the amount you think you will spend, the time you think you will live, and the funds you expect from other sources.

You can also enter the current saved amount and the monthly saved amount in some places to see if the goal has been achieved. Remember, if you deposit money in your retirement account, you invest it in assets that are expected to increase in value over time. Your rate of return will determine how much investment income you will have, and the retirement calculator can enter your position here. It is best to use an estimate of 5% or 6%. Although your savings may grow faster than this, being conservative here will reduce the risk of retirement.

under review

Your retirement calculator should tell you how much you need to save each month to retire. If that is not feasible, then the easiest way to solve this problem is to increase savings or delay retirement. The latter saves you more time while reducing retirement time (and cost). Make adjustments until you have a plan that suits you.

Then, run the calculation again every year or every two years to make sure you are on track. If your investment performance is better than expected, you can increase your retirement date. Or, if your investment is not growing as fast as you think, you may have to withdraw it.

You may also change your mind and want to retire, so you must remain flexible. By reviewing your plan each year, you can make small changes instead of trying to figure out how to spend tens of thousands of dollars on the eve of retirement.

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