Even the best retirement calculator or most experienced financial advisor can’t predict the future. Illnesses, emergencies, and financial crises can greatly affect your retirement planning. Moreover, there’s no exact formula to determine what your retirement needs will be. The best you can do is review your current financial situation, estimate your expected needs, and shoot for a comfortable financial cushion.
DETERMINING & ELIMINATING EXPENSES
When determining expenses, begin with your current expenditures. Review how much you spend and on what. Determine which expenses will still be relevant when you retire. Items such as food costs, utilities and car expenses are good places to start.
Next, review health care costs, entertainment, travel and any other expenses that will increase or decrease depending on your retirement situation. Then determine which expenses can be cut entirely. A home mortgage, childcare, college tuition costs, and work related expenses might be eliminated completely.
Take the total of your current expenses that will carry into your retirement and multiply this by 2% a year for each year you have left until retirement. This will factor in inflation.
Example: If you are currently age 56, and you would like to retire at 65 and your total monthly expenses equal $2000 then:
Year 1 = $2040
Year 2 = $2080.80
Year 3 = $2122.42
And so on, for a total of 9 years, at which point you would be 65.
This total, added to estimated futures expenses, will give you a fair estimate of your retirement needs.
FORMS OF INCOME
Next, you must determine your projected level of income. Your nest egg should be viewed mainly as an investment and reserve fund for emergencies, to be supplemented by outside forms of income. Pensions and social security should be factored in, but remember, the Social Security Administration advises that benefits could begin to be reduced in the year 2041, paying only 78% of estimated benefits.
If you plan to work during retirement, then this income should be considered as well. Earning money through eBay, antiquing, and hobbies like woodworking, craft making, etc. are all legitimate forms of income and should be included. Just remember to keep your estimates realistic.
This article is for informational purposes only. Any action taken by the reader due to the information provided in this article is at the reader’s discretion.