The prospect of retirement tends to make a lot of people nervous because it is associated with so many unknowns. You need to decide when you will retire, how you will pass the time and of course how much money you’ll need to make this all become your reality.
It is not wise to simply guess how much you’ll need or to follow the advice of your annuity provider blindly. Instead, take the time to figure out what retirement means to you and translate this into a dollar amount that you can use to pin your goals to in the future. By answering the following questions you’ll eventually arrive at a number that is very close to what you’ll need to save to retire on your terms.
How Much Do You Intend to Spend?
Although you may be focused on the income side of the equation you should actually be more concerned with how much money you intend to spend. During retirement your income stream comes to a halt and you start living off of your savings and investments so your spending habits become much more important. If you envision a lot of travel or you want to cater for spoiling grandkids or the possibility of increased health care costs you need to factor these things into your spending side.
One easy way to come up with a figure for what you are likely to spend is to adjust your current spending either upwards or downwards. Most people end up spending the same or even more during their retirement years so it is best not to be too conservative in your estimates. For instance, you may think that getting rid of your mortgage payment would cut your spending considerably, but then again, you might want to travel a lot more when you have the time.
Will You Work Part Time?
If you want to come up with a realistic estimate of how much you will need to retire you need to decide if you will work part time or completely give up all paid work. This affects your estimate for your income so it is imperative that you factor it in as well.
What Age Will You Retire?
How old you are when you decide to retire will also affect how much money you need to save because the longer you spend in retirement (i.e. the earlier you retire) the more you will need to have stashed away. This is why people who realize they have fallen short often have to work a little longer than they intended to make up for the difference.
What Does Your Retirement Income Look Like?
To estimate how much you need to save you should also take into consideration your other retirement income. If you expect to collect both a state and company pension you should include this before deducting from it what you estimate your spending level to be. This gap in income will bring you pretty close to the figure you need to strive for before you can give up working for good.
Adjust for Inflation
When you have done all this, the last part of the equation is to adjust your figure for inflation. Multiplying your estimate by a factor representative of inflation acknowledges that the cost of living in the future will be higher than it is today, which is the key to finding a how much money you really need to retire.