Few people think about retirement until they need to think about retirement, only to discover there is just not enough to sustain their current lifestyle for 20 years or more. Whether you are 40 years away from retirement or 1 year away, it isn’t something that can be ignored. No matter who you are or how much money you have, you can take these 4 simple steps to figure out your retirement plan and can also determine what, if any, external advice you’ll need. Knock yourself out!
1. Estimate How Much Money You Plan to Spend Each Year for the rest of your life
How can you possibly know where to begin? Well, as a general rule of thumb, retirement planners estimate that you’ll spend approximately 70% of the income you earned while you were working (example: if you’re making $80,000 at retirement, you’ll need about $56,000 per year). However, it should be noted that major expenses and debts MUST be paid off for this rule to work. If you’re paying off a mortgage, you have high medical bills, you have expensive hobbies, or you’re (God forbid) STILL paying off student loan debt, you may actually need to spend more in retirement than when you were working. A good way to determine if you can afford it is to create a hypothetical budget. Every individual is different: if your mortgage is paid off, but you plan to take multiple vacations per year, you may be able to afford these hobbies with some planning. It’s also worth noting that senior couples tend to spend as much as $350,000 on medical care during retirement, so poor health may put a damper on may things.
2. Calculate How Much You’ll Receive from Pensions and Social Security
Odds are you will receive supplemental income from one or more of these sources during retirement, if you were employed during your lifetime, and or if you paid taxes while self-employed. Many people look to Social Security in particular as their main source or their only source of income during retirement, and although it’s a fixed amount, savings is the other half of the equation and it is the only one that you can control — this includes money from your IRA, 401(k), 403(b), etc. because these are not constant amounts. You can determine how much money goes into these accounts at various stages in your career.
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