One of the most confusing parts about retirement is determining how much you need to retire.
Most people just save whatever they can and hope that it’s enough when it comes time to retire.
But if you want to sleep well at night, you need to figure out what your magic number is – exactly how much money you need to retire.
Your magic number is not the same as other people’s number – because it’s based on things like:
- Where you plan to retire
- What you plan to do during your retirement
- The lifestyle that you plan to enjoy after you’re retired
So you’re probably wondering how to calculate your magic number and find out how much you need to retire. The process sounds confusing, but it’s much easier than you think.
Here are 5 simple steps to determine exactly how much money you need to retire…
#1 – Create A Future Budget
If you’re like most people, you may plan to have your house paid off at retirement as well as other things, such as credit cards, student loans and more.
Ideally, you’ll have a nominal housing expense, a vehicle expense, utilities, healthcare costs and food. You may also want to include some extra money in your budget for leisure or travel, unexpected expenses and more.
Create your budget based on today’s values for ease of use initially.
#2 – Determine How Many Years You Have Until Retirement
As a next step, determine how many years you have until you realistically plan to retire.
Keep in mind that you may need to adjust this figure if you find that you can’t feasibly save enough money between now and then. On the other hand, if you’re fortunate enough to be ahead in your savings efforts, you may be able to retire earlier than you’re planning.
#3 – Apply an Inflationary Rate
Next, consider what a reasonable inflationary rate is – such as 3%. Apply this rate to your budget expenses based on how many years you think will pass between now and your retirement years.
Keep in mind: the actual inflationary rate may not match your projected figure. Because of this, it’s important that you update your figures every year or two and adjust your savings efforts accordingly when planning how much you need to retire.
#4 – Determine Your Social Security Income
Through the Social Security Administration’s website, you can project your Social Security income.
There’s some concern over whether Social Security income will be present in later generations, and some sources have stated that it will be available at a lesser amount. Therefore, use this figure with an ounce of speculation.
Some may decide to plan their retirement completely without it and will consider it a bonus if it is in place when they do retire.
#5 – Calculate the Difference
With all of these calculations, you’ll be able to determine how much money you need to generate each month to make ends meet and hopefully enjoy the kind of lifestyle that you want to enjoy in your retired years.
This income can be generated in a number of ways – such as from Social Security income, dividends, real estate income, or withdrawals from your retirement account.
If you plan to live off retirement income for several decades, you may want to think about the benefit of residual income. This is income such as interest, dividends or real estate rental income that you can generate on a monthly basis and that does not eat into the value of your nest egg.
The Best Retirement Calculators
Don’t want to do all the work yourself? Then use these handy retirement calculators instead to determine how much you need to retire:
- Bankrate’s Simple Retirement Calculator
- Vanguard’s Retirement Nest Egg Calculator
- CNN Money’s Simple Retirement Calculator
- Financial Mentor’s Simple Retirement Savings Calculator
Those may be the best free retirement calculators online. But if you want to be able to continually change your data and save your results, this Flexible Retirement Calculator is a good choice. You simply download it to your computer and you can continue to modify it year after year.
Here are some of the pros & cons of using retirement calculators.
Whether you choose to use the 5 steps outlined above or monitor your results using a retirement calculator, you should review your retirement calculations periodically. That way, you can make adjustments whenever things change and ensure that you stay on track to retire within the timeframe that you desire.
I’m a health nut, a frugal mom, a dog lover, a DIYer, and a gadget girl. Personally, as a post-divorce, working single mom on a budget I have a lot of experiences that I enjoy sharing so others can learn from the things I wish I knew earlier! Professionally, I’ve worked full-time in a variety of marketing, sales, and editing jobs. You can always find me at the corner of Good News & Fun Times as Managing Editor at The Fun Times Guide (32 fun & helpful websites).