In previous articles, we have looked at diversifying our investments, our income, and finally our sources of retirement income. Today, I want to look at the simple process of determining just how much you are going to need in order to retire comfortably.The first step is to estimate your current living expenses. If you use a budget, this step will be very easy and very accurate. You can even average you expenses over several months to provide a better picture of what you spend. If you do not use a budget (shame on you) it will require a little more work, but it is still pretty easy to do.
Once you have your expenses identified, it is time to take a look at what you are spending your money on. There will be certain things that you will no longer need to pay for after you retire. Hopefully, your home will be paid for, you will no longer need life insurance, and you should see a reduction in expenses related to work, such as commuting costs and clothing. You should also adjust your travel expenses and recreation expenses to reflect things that you would like to do once you are retired.
Let's say that you have a family income of $80,000. After adjusting you living expenses above, you will find that you will be able live quite comfortably on 60 to 70% of your current income. In our example you would need to have a retirement income of about $56,000.
The next step is to add up your investments. Most people have no idea how much money they have saved in various retirement accounts. Maybe you have an IRA that you haven't contributed to in five years. You have a 401k plan that you contribute to on a monthly basis. Maybe you have other investment accounts as well. All of these things need to be totaled so you can determine where you are.
The more money you have saved to this point in your life, the less you will have to save between now and retirement. You do not want to use your house in this calculation unless you are intending to sell it and pocket the money when you retire.
You now have an idea of what it will cost you to live after you retire and how much you currently have saved for retirement. At this point you must make some assumptions about the future in order to determine how much you need to save to complete your retirement savings.First you need to estimate your lifespan. How long you live will determine how much money you need to have saved so that you will not run out of money before you run out of life. A cool online longevity test can be found at:
/tn/learnctr--lifeevents--longevity
You work through several steps and as you answer the questions, it will give you an estimate of how long you should live. It also will give you suggestions for increasing your longevity.
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