It is important to have a plan for your retirement, but where should you begin? The first step that you should take is to estimate the income that will be required to fund your retirement. However, it is not as easy as it sounds since retirement planning is not an actual science. Your needs will depend on what your goals and requirements are.
You Current Income: The Starting Point
Your desired annual retirement income is something you should decide on first. It depends on who you discuss it with, but it can be anywhere from 40 to 80 percent of your current income or even more. This approach is quite simple and straightforward since your current income is what sustains 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, there is a problem with this approach as it does not account for your specific situation in the future. It’s good to use your current income as a yardstick, but it is also worth it to go through your current expenses extensively and think through the changes that these expenses might go through in the future.
Plan Your Retirement Expenses
The income you get in your retirement period should be enough for your retirement expenses. Therefore, it is important that you estimate those expenses as it is a huge piece of your retirement planning. However, if your retirement period is still quite far away, then determining these expenses can be difficult. To help in getting started, a few of the common retirement expenses are mentioned below:
- Clothing and food
- Housing (property taxes, repairs and upkeep, rent, or mortgage)
- Utilities (electric, gas, water, etc.)
- Transportation (auto payments, maintenance and repairs, public transportation, etc.)
- Healthcare cost (those not covered by the insurance)
- Education (children’s or grandchildren’s)
- Savings and investments
- Care for yourself or family
- Miscellaneous (personal)
You should keep in mind that the living costs can increase with time. You should also keep in mind that the retirement expenses can change from year to year. To protect yourself from unknown variables, you should create a comfortable cushion for yourself with your estimate. Moreover, you should ask for expert financial help to set up for your retirement.
Decide Your Retirement Period
Defining your retirement needs is not the only goal, because you can’t merely estimate the annual income that you will require. You will also have to decide how long you will be retired. The longer your retirement period is, the more years of income that will be needed for funding your retirement. Therefore, it depends on you when you plan on retiring. This decision is usually based on your personal goals and your financial situation.
Your Life Expectancy
The age at which you choose to retire isn’t the only factor to be looked into. You will also need to estimate your lifespan. We all hope to live a long life; but the longer your life, the more years of retirement that you will need to fund. To avoid outliving your retirement savings, you can use government statistics and life expectancy calculators to estimate your lifespan.
Identifying the Sources of Retirement Income
Once you have determined all your retirement needs, you will have to look into the sources of your retirement income that might be available to you. The amount of income that you will receive from these sources depends on how much you invest in them, the rate of investment return and other such factors.
There are steps that you can take to cover the gap if you do not anticipate being able to save enough. A financial professional will be able to guide you, however here are some of useful tips:
- Cut back on current expenses
- Turn your assets into investments that may have a potential outpace inflation
- Lower the retirement expectations
- Part-time work during retirement
Delay your retirement for a few years