How to Prepare for Retirement
Figure out how much you need to spend., Consider changes in your lifestyle., Calculate your annual income gap., Calculate how much you will need to save.
Step-by-Step Guide
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Step 1: Figure out how much you need to spend.
Many financial advisers use a rule of thumb for needed retirement income of 60 to 66 percent of current pretax income.
However, this estimate is just a rule of thumb for an average case.
To estimate your retirement expenses yourself, begin with a baseline, and then make adjustments.
For your beginning baseline, start with your current monthly income.
This will give you an idea of how much you currently spend each month.
Then deduct expenses that you currently have that will disappear after retirement.For example, suppose your current monthly income is $5,000 after taxes.
Assume that your monthly expenses equal your monthly income, so begin with this number.
Deduct your savings.
After retirement, you won’t be saving any more.
Suppose you save $500 each month.
Deduct that from your total. $5,000−$500=$4,500{\displaystyle \$5,000-\$500=\$4,500}.
Deduct how much you’ll save in living expenses if your home is paid off by the time you retire.
For example, if you're paying $1,000 per month towards your home and it is paid off, you no longer have to pay that amount in retirement.$4,500−$1,000=$3,500{\displaystyle \$4,500-\$1,000=\$3,500}. -
Step 2: Consider changes in your lifestyle.
If you are going to travel, then some expenses might increase.
However, you might also decide you need to spend less on commuting, clothing and groceries.
Suppose you can reduce your monthly transportation, grocery and clothing budget by $300 per month.
But, you plan to take one large trip each year for $5,000, so you plan to save $450 per month for this trip.
The net change means adding $150 per month to your budget. $3,500+$150=$3,650{\displaystyle \$3,500+\$150=\$3,650}., Determine how much income you will receive from your current retirement savings, including Social Security, your pension and any retirement accounts you already have.
Compare that monthly income with your estimated monthly expenses.
Multiply that number by 12 to get your yearly income gap.Using the above example, you estimated that you will spend $3,650 each month in retirement.
Suppose you know you will receive $1,100 from Social Security and $1,250 per month from your pension.
Your monthly income will be $1,100+$1,250=$2,350{\displaystyle \$1,100+\$1,250=\$2,350}.
Your income gap is $3,650−$2,350=$1,300∗12=$15,600{\displaystyle \$3,650-\$2,350=\$1,300*12=\$15,600}. , Assume you will want to withdraw 4 percent from your retirement savings per year.
Multiply your annual income gap by 25 to estimate 25 years of living past retirement.
This will tell you how much more you need to save between now and retirement in order to have enough.In the above example, you annual income gap is $15,600.
Multiply this by
25. $15,600∗25=$390,000{\displaystyle \$15,600*25=\$390,000}.
You need to save an additional $390,000 using retirement accounts such as a 401(k) or IRA.
These numbers are rough estimates and presume no draw down of principal after retirement.
You may have to adjust your calculations to include more years of retirement if your spouse is much younger than you are.
Another option is purchase a lifetime annuity.
These annuities can be purchased for a variety of amounts that provide different payouts as income each month or year for life.
For example, an annuity to fill your $15,600 gap over your 25-year retirement would likely cost you about $160,000. -
Step 3: Calculate your annual income gap.
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Step 4: Calculate how much you will need to save.
Detailed Guide
Many financial advisers use a rule of thumb for needed retirement income of 60 to 66 percent of current pretax income.
However, this estimate is just a rule of thumb for an average case.
To estimate your retirement expenses yourself, begin with a baseline, and then make adjustments.
For your beginning baseline, start with your current monthly income.
This will give you an idea of how much you currently spend each month.
Then deduct expenses that you currently have that will disappear after retirement.For example, suppose your current monthly income is $5,000 after taxes.
Assume that your monthly expenses equal your monthly income, so begin with this number.
Deduct your savings.
After retirement, you won’t be saving any more.
Suppose you save $500 each month.
Deduct that from your total. $5,000−$500=$4,500{\displaystyle \$5,000-\$500=\$4,500}.
Deduct how much you’ll save in living expenses if your home is paid off by the time you retire.
For example, if you're paying $1,000 per month towards your home and it is paid off, you no longer have to pay that amount in retirement.$4,500−$1,000=$3,500{\displaystyle \$4,500-\$1,000=\$3,500}.
If you are going to travel, then some expenses might increase.
However, you might also decide you need to spend less on commuting, clothing and groceries.
Suppose you can reduce your monthly transportation, grocery and clothing budget by $300 per month.
But, you plan to take one large trip each year for $5,000, so you plan to save $450 per month for this trip.
The net change means adding $150 per month to your budget. $3,500+$150=$3,650{\displaystyle \$3,500+\$150=\$3,650}., Determine how much income you will receive from your current retirement savings, including Social Security, your pension and any retirement accounts you already have.
Compare that monthly income with your estimated monthly expenses.
Multiply that number by 12 to get your yearly income gap.Using the above example, you estimated that you will spend $3,650 each month in retirement.
Suppose you know you will receive $1,100 from Social Security and $1,250 per month from your pension.
Your monthly income will be $1,100+$1,250=$2,350{\displaystyle \$1,100+\$1,250=\$2,350}.
Your income gap is $3,650−$2,350=$1,300∗12=$15,600{\displaystyle \$3,650-\$2,350=\$1,300*12=\$15,600}. , Assume you will want to withdraw 4 percent from your retirement savings per year.
Multiply your annual income gap by 25 to estimate 25 years of living past retirement.
This will tell you how much more you need to save between now and retirement in order to have enough.In the above example, you annual income gap is $15,600.
Multiply this by
25. $15,600∗25=$390,000{\displaystyle \$15,600*25=\$390,000}.
You need to save an additional $390,000 using retirement accounts such as a 401(k) or IRA.
These numbers are rough estimates and presume no draw down of principal after retirement.
You may have to adjust your calculations to include more years of retirement if your spouse is much younger than you are.
Another option is purchase a lifetime annuity.
These annuities can be purchased for a variety of amounts that provide different payouts as income each month or year for life.
For example, an annuity to fill your $15,600 gap over your 25-year retirement would likely cost you about $160,000.
About the Author
Denise Gomez
Creates helpful guides on pet care to inspire and educate readers.
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