Most experts say you’ll need 60% to 85% of your current gross household income to keep the same lifestyle you have now after you retire. That’s probably a good guess but maybe you should look at the issue of determining your retirement income needs in the 21st century in a slightly different way.
You could make a list of assumptions about what your lifestyle and your living expenses will be after you retire or you can make an educated guess based on your current living expenses. But why bother, after all, retirement’s still a long way off, and we have no real idea of what those expenses will be then.
Most of us won’t take the time to figure out how to work some complex retirement process. You do, though, know what it costs to maintain your lifestyle today and you probably won’t be saving much more money or paying payroll taxes after you retire. If you take taxes and savings out of the your gross income you, you’ll have a good idea about how much money it will take to keep your current lifestyle if you retired today.
Simply put, you want retirement income that equals your net income today. Your net income is what you would need if you retired right now.
You may want your retirement lifestyle to be different than it is now. Some folks can get by on much less than they use now, while others may decide they want more. It’s a personal choice for each of us. So, take a look at what you want to do after you retire and and then make an estimate about how much money you need to retire.
There’s some basic questions to answer:
How many years will I need that income?
This is a major concern, after all, no one wants to out live their income after they retire. Will your income keep pace with inflation throughout those years? Will you have to draw down your starting retirement portfolio to support your income needs or just will you be able to live off the earnings without touching the principal?
There’s things to consider that will eat into your retirement income:
How about inflation? How much will your retirement income have to be after retirement after it has been adjusted for inflation and costs for things we need over the years have increased? What should that inflation rate be anyway? You could use a historical average or just make an educated guess.
If you can answer those questions, then you can determine how much money you need at retirement to support you for the rest of your life.
There are some pretty sophisticated calculations based on assumptions about future costs. If any of these assumptions change, it could radically alter the results. Some of the calculations are hard to understand.
What we really need is a simple way to give us an idea of what we need to do to get started. We can save the more esoteric efforts for later.
So forget about inflation for the moment. Ignore Social Security and any company pension you may get. Pretend your money gets no return now or after retirement. But count all the money you’ve saved for retirement as of today.
How Much Do I Need To Save?
That’s the question you need to answer. There’s a really simple way to find out how much you need to save. Here’s an example, let’s say your savings amounts to $20,000. And, let’s say you want an annual income of $40,000 in today’s dollars after you retire. That’s about what it takes to live comfortably today with little or no debt (based on my experience).
Then let’s assume you want to retire in 30 years and that you’ll live the average of 20 years after you retire.
The two questions you need to answer are:
1. How much money do you need to have at the start of your retirement to support yourself in your golden years?
2. How much do you need to put in savings every year between now and then to get there?
How Can I Calculate Retirement Income?
Take that $40,000 you want as annual retirement income and subtract what your social security benefit might be. The average monthly social security benefit is about $1500 or about $18,000 a year. That means you need an additional income of $22,000 a year to keep your same lifestyle.
If you need $22,000 a year for 20 years, that comes to $660,000 that’s needed in the first year of retirement. You already have $20,000, so that means you’re only $640,000 short. Divide the shortage by the 30 years you have to save it up, and you discover you only have to cough up $21,333 every year between now and the time you retire to have a life of retirement leisure.
Too much is left out of this simple approach to provide any meaningful answers to the question at hand. Not many of us can afford to save $2000 bucks a month. Even worse, the answer makes the whole idea of saving for retirement seem like an impossible task, but this is far from true.
To do things right, you must take a cold, hard, objective look at your desired income, subject it to a rational choice of assumptions, and make some detailed calculations based on all your income streams. You might even need the services of a good financial planner to get on the right track.
The best way to do retirement calculations is with one of the software packages available commercially and on some free government websites. You can find many different retirement calculators online that can help.
The idea is to use realistic assumptions and expectations to plan your retirement. It’s your choice. How much you enjoy retirement depends on how you plan for it.
Get a copy of my new e-book, “Personal Retirement Planning” and find out how to calculate how much your retirement will cost. Edited from my first hand perspective and updated for the 21st century. And, best of all, it’s absolutely free.