It’s necessary to have a plan for when you retire, but where do you start? One of the first steps is figuring out how much income you will need during your retirement. This isn’t as easy as it sounds. Your plan will depend on what your goals and needs are for retirement.
Your current income will be your starting point
Your desired retirement income is something you should try to figure out first. How much will you need to live comfortably in retirement? It may be anywhere from 40 to 80 percent of your current income or possibly more. Looking at your retirement needs this way can be a little easier since your current income is what allows for your lifestyle. Taking the income that you earn now, and reducing it by a certain percentage will give you an idea if you can afford to retire on that amount given the monthly expenses that you have.
However, with this approach, it does not account for change in situations, your goals, or your specific idea for retirement. Using your current income as a base is a good start, but it’s also worth going through your current expenses and thinking about what changes may occur in the future. Will you pay off your mortgage and stay in your home through retirement or will you downsize? Will you get a vacation home? Will you move to a new city? You get the idea. There is a lot more to consider when it comes to your future expenses.
Plan your retirement expenses
The income you get during your retirement period should be enough to cover your general living expenses through retirement, such as utilities, food, and transportation. Therefore, it’s important that you try to estimate these expenses. Now, if your retirement period is still quite far away, then determining these expenses can be difficult and a bit intimidating.
Some common expenses you may have during retirement.
Clothing and food
Housing (property taxes, repairs, and upkeep, rent, or mortgage)
Transportation (payments, maintenance, public transportation, etc.)
Healthcare cost (not covered by insurance)
Education (children's or grandchildren's)
Care for yourself or your family
You should keep in mind that your cost of living will increase over time. You also have to keep in mind that retirement expenses can fluctuate from year to year. To help protect yourself from unknown variables, you should create a comfortable cushion for yourself when planning for expenses.
Decide your retirement period
Defining your retirement needs isn’t the only factor; simply estimating the annual income that you will need to live is part of the planning. You should also consider how long you plan on working? Do you want to retire earlier to travel? Are you planning on retiring when other benefits come into play such as social security? The earlier you retire the more income you will need to fund your retirement.
Identifying sources of retirement income.
Once you have considered all your retirement needs, you should take a look at the different sources of your income that may be available to you during retirement. Some sources to consider are an IRA, certificates,401k, pension or even a HSA (Health Savings Account). However, the income that you receive from these sources depends on how much you invest in them.
Possible income shortfalls.
There are steps you can take to ease any concerns you may have about not being able to save enough for retirement. You could cut back on current expenses so you can put more towards your retirement savings. You may need to consider getting part-time work during retirement. You also may see that you need to work a little longer than originally planned and delay retirement.
With some careful planning and some budgeting, you can be well on your way to a safe and secure retirement.