Retirement – How Much Do I need

You may not be thinking about your retirement right now, most people don’t…

But do you know how much money you will need to enjoy your retirement years?

It is a common question asked, what is the magic number.

Now if you follow this blog you will know that taking control of your money for financial freedom is what I am trying to guide you toward.

And financial freedom can come long before retirement…

Having said that though, there is still a requirement to be planning for your retirement.

It is important to know up front that there is no one answer, and there are a few unknowns that make it a complicated question to answer.

Such as how long are you going to live, what physical condition you will be in and what assistance will be available at the time of your retirement?

These unknowns should be a further incentive for you to take control of your money now…

…and make sure that you have your financial future taken care of long before you get to retirement age.

You can, however, estimate a retirement savings goal with some useful tools and a little educated forecasting.

Here are five steps to calculate how much to save for retirement.

1. Estimate future spending

This is likely to be the hardest step for a couple of reasons…

First to project future expenses you need to begin by taking a look at current spending.

And that is often what stops people in their tracks.

Most people don’t know their current spending, they don’t have any form of a tracking system. Click here for some suggestions on how to get started.

The key is to understand what you currently spend and how that will change over time.

What will increase in cost and what will decrease? For example, you would expect that your debt will decrease and therefore interest payments will be less.

The fun part of this process is estimating what you want to spend on things you will do in retirement, like travel.

Once you have completed planning your future expenses, convert it to an annual amount.

That’s the hard part done…

2. Retirement – What income will I need?

The annual projected spending from above is a good estimate of the income you will need.

However, research suggests that you probably didn’t do step one above…

I get it, there is a bit of work involved and potentially some confronting observations about your current spending.

So here are some alternative methods you can use. They are not as accurate as calculating your projected expenses but will get you an understanding of what you will need.

The one used most often is the 80% rule…

This one suggests you should aim to replace 80% of your pre-retirement income.

Your pre-retirement income isn’t what you earn now; it’s the average of what you expect to earn in the 10 years leading up to retirement. (Here’s a calculator to help you)

One of the main factors of this rule is that it assumes you are paying off a mortgage AND that you are putting some money aside for your retirement.

If you are not currently investing any of your current income, you will need to skew the 80% to a higher number.

I good way to check the rule of 80 is to complete point one and compare 🙂

3. Use a retirement calculator

If you’re thorough about your inputs, a good retirement calculator will give you an assessment of where you stand in your savings progress…

Try this calculator to see where you are currently positioned…

Don’t be too scared by the outcomes. The key is to get an understanding of what needs to be done.

Consider this a wakeup call if you are a long way from where you need to be…

Understand that the calculators are based on some key assumptions, such as an annual rate of return of 6% to 7% and an expected life span based on current data.

What should be clear to you now, or by the time you have a go at the calculator, is that the earlier you start, the better off you will be…

4. Have a retirement plan

Take what you have learned from the first three steps and put it into writing…

Having something to refer back to will help keep you on track.

One of the biggest dangers to your retirement lifestyle is procrastination. Putting it off to tomorrow just won’t work.

By having your plan in writing you can refer back to it regularly to remind you of why you are investing for your future.

And remember the benefits of compounding…

If you keep spending today because you aren’t worried about your future, you are only hurting yourself and your future lifestyle.

The majority of your returns come in the later years, but they require a consistent application over time.

If you think you can wait another year to start, think about the impact that will have in 10, 20, 30 or 40 years on your returns…

Without exaggerating, it will be more than $1,000,000 on any reasonable investment strategy, ouch, that hurts.

“Don’t put off to tomorrow what you can do today”

5. Revisit and Revise Regularly

Circumstances change, and your retirement needs will change with them.

Whether it’s a new job, a new baby or a new passion to travel the world once you hit 65, performing these retirement calculations fairly often makes sense.

If you are keen you could do the calculations a couple of times a year… or just when your circumstances change…

But always know what you need and use it as a motivation to keep on track with your investing goals.

At a minimum, you should be aiming for a comfortable retirement lifestyle for a longer-term goal.

And I also recommend that you start investing now to take control of your money, get out of debt as soon as possible and achieve real financial freedom long before retirement age.