How To Calculate Future Annual Amount Needed For Retirement

How to calculate future annual amount needed for retirement is not a question only for those approaching retirement; young people entering the workforce need to establish a retirement plan early in their careers. Financial planners suggest that your retirement fund needs to replace between 70%-100% of your pre-retirement income. It is strongly recommend that your plan should replace 100% of your salary. People are living longer and your goal should be to live comfortably throughout your golden years.

There are a number of good online retirement calculators, but to use them effectively, you need to do some good estimates on your retirement expenses and the income you can expect in your retirement years.

1. Estimate Your Retirement Expenses. You should know where your money is going now, and you can use your current expenses as a starting point. Keep in mind that when you retire, your expense structure may change; you will not have commuting expenses, your mortgage might be paid off and you will not be paying Social Security and Medicare taxes. Health care, leisure and travel expenses may increase. Medicare will not cover all of your health care requirements, and you need to ensure you are adequately covered. Inflation needs to be factored into your expenses; if you retire at 65 and live to be 90, inflation will impact your cash flows. Your life expectancy is a dynamic in your retirement estimate and if you are in good health, you should be projecting that you will live past 90 years of age.
2. Sources of Income in Retirement. A properly funded retirement should come from a variety of income sources. The following describes how you can estimate your retirement income from the various sources.

• Social Security – The Social Security Administration mails every worker over 25 years of age an annual statement. The statement shows your estimated retirement, disability and survivors benefits. The statement is mailed three months prior to your birth month and if you do not have it by your birthday, you need to contact the Social Security Administration. Review the statement carefully and report any discrepancies to the Social Security Administration.
• Employer Pension Plans – If your employer has a pension plan and you are vested in the plan, you should receive an annual statement; the statement should include the current value of your pension and an estimate of your benefit at your retirement age. If you don’t receive your statement, contact your Benefit Department.
• Employer Sponsored 401(k) Plans – If you participate in a 401(k) plan, you should be able to access your plan online or receive a statement from the Plan Administrator. To estimate the value of the 401(k) at your retirement age, add the current value, the estimated future contributions and the expected rate of return up to your retirement date.
• Individual Retirement Accounts – If you have an IRA, you can estimate the value the same way as a 401(k) plan; add the current value, the estimated future contributions and the expected rate of return up to your retirement date. Keep in mind that in retirement the principal in your 401(k) or IRA should continue to generate income. This income can be part of your retirement estimate. Per the IRS regulations, you do need to start withdrawing from these accounts by the time you reach 70 ½ years of age, or you will face stiff penalties.
• Other Savings or Investment Income – Factor in your other income sources such as CD’s, savings and brokerage accounts or real estate investments.

Remember inflation impacts your future cash flows, both expenses and income sources. 

You can find numerous retirement calculators online where you can run retirement models. Both the AARP Website and the Yahoo Finance page have calculators. You now have the steps required on how to calculate the future annual amount needed for retirement. Develop and stick to your retirement plan, and enjoy your golden years.