How to Estimate How Much Money You'll Need to Retire

Four coin-filled, graduated-sized jars with seedlings that represent the steps to estimating your retirement needs
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People have their own unique picture of what life will be like when they retire. That means the amount of money you'll need to retire can be much more—or far less—than others your age. To make sure you're on the right track when planning for the day you retire, you'll need to create your own financial estimate.

To start, you'll need to figure out the amount of money you expect to spend each month after you retire. This figure will help you build the rest of your plan. If you want to spend more in retirement, you'll need to have more money saved. The age you want to retire will also have a big impact on how much money you'll need. If you want to retire early, you'll need far more saved than someone who plans on working longer.

Taking these four steps will help you come up with your estimate of how much money you'll need to retire.

1. Figure Out Your Yearly Expenses

Your first step is to come up with the amount you think you'll spend each year in retirement. This should include an estimate of taxes you will pay on retirement income. Start by looking at how much you spend each month on normal items. Keep in mind that these items may change once you've retired. For instance, clothing costs may go down, but travel spending may go up. Multiply your monthly expenses by 12 to come up with a base annual amount.

Add in costs for expenses that occur yearly, such as car registration and insurance premiums. Also, take into account costs that don't fall on a simple monthly or yearly schedule, such as fixing the roof on your house or having dental surgery.

2. Add Up Income From Guaranteed Sources

The second step is to figure out how much retirement income you will have from guaranteed sources, including pensions, Social Security, and monthly annuity payments. The more guaranteed income you will have, the less you will have to rely on your savings.

3. Find the Gap and Determine Your Savings Needs

The third step is comparing your guaranteed income to your estimated expenses and finding the gap between them. For instance, if you have $50,000 of estimated annual retirement expenses and $30,000 of guaranteed income, your gap is $20,000.

This gap is the annual amount that you will need to withdraw from your savings and investments each year. Multiply the gap by the number of years you expect to be retired to create an estimate of how much you'll need to have saved to be financially secure when you retire.

In the best case, at least half of your estimated expenses will be paid for by guaranteed income by the time you reach age 70. If that may not be the case, you may want to think about buying an annuity to provide a higher guaranteed monthly income.

You'll feel much better once you have spent the time needed to plan for your retirement. And if you're feeling overwhelmed by all of the aspects of planning, think about hiring a retirement planner.

4. Create Best-Case and Worst-Case Scenarios

Things like the rate of return on your investments, life expectancy, inflation, and how much of your principal you spend will have a big impact on the amount of money you will need to retire. To account for these variables, you will want to come up with both a best-case and worst-case scenario.

The best case would assume average to above-average returns on investment, average life expectancy, and low inflation. The worst case assumes below-average returns, above-average life expectancy, and high inflation. If your planning only works if you get a best-case outcome, you need to figure out a different path. Perhaps you'll need to work longer, save more, or spend a little less when you retire to get your plan on solid ground.