Each one of you has a different picture in your head of what you want retirement to be like. That means the amount of money you'll need to retire can be much more, or far less, than others your age. What you want to do is to come up with a personal estimate.
You start by calculating the amount of money you'll want to spend each month. This is the most important step you can take. If you want to spend more in retirement, obviously, you'll need to have more saved.
Your retirement age will also have a big impact on how much you'll need. If you want to retire early you'll need far more saved than someone who plans on working longer.
The four steps below will help you come with your own estimate of how much money you'll need to retire. The title of each step links to a more in-depth article that will walk you through that step in greater detail.
4 Steps To Determine How Much Money You Will Need To Retire
To determine how much money you will need to retire, you must first estimate your retirement expenses; how much you think you will spend each year in retirement, including an estimate of taxes you will pay on retirement income. You start by taking a look at your spending habits. Then you adjust them based on things that may increase or decrease once you retire. The link above takes you to an article that walks you through this process. Or you can use an online retirement income calculators to help you with rest.
It will be important for you to figure out how much retirement income you will have from guaranteed sources. That includes income sources like pensions, Social Security, and monthly annuity payments that you may receive. You will then compare this income to your estimated retirement expenses.
The third step you'll take is calculating the gap between retirement expenses and guaranteed sources of retirement income. This gap represents the annual amount that you will need to withdraw from your own savings and investments each year. You'll be able to add up each year's gap over your expected retirement years to create an estimate of how much you'll need to have saved to be adequately prepared for retirement.
Variables like your rate of return on investments, life expectancy, inflation, and your willingness to spend principal will all have a big impact on the amount of money you will need to retire. To account for these variables you will want to develop both a best and worst case scenario. If your retirement only works if you get a best-case outcome you need to figure out a different path. Perhaps you'll need to work longer or save more to get your plan on solid ground.