How To Calculate Retirement Needs
As people age, the question of how to calculate retirement needs becomes more and more pressing. With the current state of the economy and some government programs that may go bankrupt, the task of calculating and saving for retirement has become a more personal job. Employers and the government may be counted on for some retirement income, but they may not cover the full cost.
- How to calculate retirement needs begins with deciding what the age of retirement will be. Knowing this age will determine how many years retirement will be and how many years will need to be funded. The average life expectancy is into the 80s so if someone retires at 65, that leaves roughly 20 years to plan for. More and more people are retiring at 55 which leaves about 30 years of retirement to plan for.
- Once the total number of years of retirement is known, determine the kind of lifestyle that is wanted in retirement. The majority of people want to continue their current lifestyle. To continue the current lifestyle, the estimated annual income at the time of retirement is needed. For this example we will assume $75,000. When doing calculations, inflation is taken into account.
- Begin with $75,000 and multiply this by 1.0304 (inflation) and this will give you $77,280. This is the amount needed in the first year of retirement to continue the current lifestyle. It should be noted that some people do their calculations only using 75% of the final annual income. They do this because traditionally their expenses at retirement are lower due to children not living at home, debt being paid off, downsizing on a home, etc. If this route is to be taken, the first calculation will be different. Take $75,000 and multiply it by 75%. Then take that number and multiply it by the inflation rate of 1.0304. The rest of the calculations will be the same.
- Once you know how to calculate retirement needs for the first year, continue with the same calculations for the total number of years in retirement. Take $77,280 and multiply it by 1.0304 totaling $79,598 needed for the second year. The amount needed for the fifth year of retirement will be $87,081. The amount needed for the tenth year of retirement is $101,150 and the amount needed for the 20th year of retirement is $136,468.
- After the amounts needed for each retirement year are calculated, those amounts are to be totaled. This amount is the total amount of money that is needed to fund retirement. For a 20-year retirement, 2.08 million dollars will be needed.
- When the total amount of retirement needs are calculated, income that will be received from other sources needs to be subtracted. Social Security, pensions, trust funds, inheritances—these additional sources will lower the total amount that needs to be saved for retirement.
Figuring out how to calculate retirement needs is the easy part of the process. Once the final amount is determined, the task of saving for retirement begins.