Many people have anxiety about reaching retirement age, and understandably so. Much of the concern comes down to a fear of not accurately estimating retirement income needs. The notion of “running out of money” when one has only reached the halfway point in their retirement is indeed frightening, but it doesn’t have to be a reality. Estimating income needs is actually more straightforward than most people think, and by planning ahead, you can sidestep anxiety about the future for the duration of your retirement.
Not sure how to estimate your retirement income needs? Follow the plan outlined below for best results.
Begin With Your Current Income
Planning for anything requires you to have at least something of a baseline to work from, which is especially true when it comes to your financial future. In this scenario, you can use your current income as a jumping-off point. The most simplistic way to project retirement income needs is to take a percentage of your current income that you believe you’ll need to get by once you are no longer working—typically 60-90 percent.
While many people like this method because it’s so straightforward, it doesn’t take into consideration the entire picture. Perhaps you’d like to travel more after retirement, for example, in which case you might actually need more money than you’re currently bringing in. Use your current income as a benchmark, but don’t treat it as a rule.
Consider Retirement Expenses
In many ways, putting together a list of expenses you plan to incur during retirement is the most important part of the planning process. This helps to bring things back to reality, as you need to ensure you’re bringing in enough money to afford necessities such as housing, food, clothing, transportation, insurance, taxes, debts, and miscellaneous costs, not to mention recreation. Even costs related to caring for yourself and/or relatives, which can easily get overlooked, should be included,.
You’ll also want to account for inflation, as well as increased medical costs that could appear as you age. Clearly, there’s more to planning retirement expenses than choosing vacation destinations.
Use a Retirement Income Calculator
Once you have a few numbers in front of you, you can get a better grasp on what your retirement income needs are likely to be by using a retirement income calculator—there are many different versions available on the Internet (we like this one from BankRate.com). While many of these applications differ from each other in certain ways, they all operate similarly and take into account factors such as your starting savings balance, annual contributions, your current age, projected retirement length, and more.
Retirement income calculators can be very helpful for giving you an idea of what your needs will be, but they can also be dangerous if taken verbatim—the number you end up with should always be taken with a grain of salt.
Remember, there’s no one-size-fits-all approach to estimating retirement income needs. Because of this, you might want to consider working with a financial advisor who can take a close look at your current situation and help you determine best practices for moving closer to retirement. The more help you have on your side, the more accurate your estimate is likely to be.