The Retirement Finish Line in Style
The amount someone needs to retire comfortably varies from person to person and depends on their definition of comfortable, what wants and needs they are currently supporting, and determining future needs. You don't want to work for the rest of your life or be one of those people that retires only to discover that they have to pick up a part time job to pay the bills. If you are asking yourself how much you'll need for retirement, it's a good time to sit down and calculate it to see if you are on track or what you need to do to get in the race.
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The Common Method
The common method of calculating for retirement is to determine it as 80% of your pre-retirement income. Generally people need less money when they are retired than when they were in the workforce, but the common method makes for a very conservative method of calculating how much you are really going to need. It assumes that you won't have any dependants, you'll no longer have a mortgage, and you'll no longer be saving for retirement because you'll be there. Calculating your retirement at 80% of your pre-retirement income leaves no room for error, or for fun.
The common method is great for getting a quick estimate, but some people need more money for retirement than they make pre-retirement. Buying a new home, traveling, medical conditions brought on by old age, and gifts for the grandkids can add up quickly.
The Detail-Oriented Method
If you want a clearer picture of what you'll need to save to retire comfortably, start with what you currently have. Figure out which expenses will be eliminated at retirement and which will be retained or added. You may not have to pay much for gas because you aren't commuting anymore, but you'll still have to pay for the trips out to see the grandkids. Don't forget to add in emergency funds for medical or funeral purposes. It may be a dismal thought, but your spouse may leave you with unexpected expenses. Expect the unexpected and calculate it into your costs. Calculate your costs out per month as you would now when determining your budget.
Once you determine what you'll need month to month, you need to decide at what age you will retire and what your life expectancy is. It is always a good rule of thumb to over estimate a little so you don't end up coming up short. Once you have the number of years you will need to be supported through your retirement fund, multiply it by twelve for the number of months and multiply that number by your monthly expense total. Add an inflation rate of 12% to whatever your total is to find out your grand total of what you'll need to retire comfortably.
Next, figure out what your income sources will be during retirement. Social security, a pension, a retirement investment portfolio, or a part time job can all contribute to your retirement income. This will help you determine how much you need to save per month to reach your retirement goal. If you are saving it now, that's great. If you aren't, the sooner you start the better. The earlier you start saving for retirement the better, but it is never too late to start saving for retirement. Don't work your whole life only to have to work through retirement age. Plan ahead now and calculate what you'll need for retirement.
