Retirement may be a long way off for you, but the years will pass by more quickly than you think. Unless you’ve already got a sizable chunk of change socked away, you are likely already behind in your retirement planning. If you don’t end up with the money you need by the time you retire, you may have other options, such as continuing to invest and striking it big or getting a reverse mortgage on your home. But the best thing you can do is start planning now so that you have more control over your retirement. Start by checking out these reverse mortgage facts.
But planning for retirement may seem like a daunting task. Where do you even begin? How do you account for all the variables? Here are some easy steps you can take to figure out how much you will need in retirement:
Calculate Years of Retirement
You can’t know how much you will need for retirement if you don’t know how many years you will spend in retirement. Start by figuring out when you plan to retire. If you’re like most people, you want to retire as soon as possible. But if you’re like most people, you won’t actually retire until the full benefit age of 66. Soon, that age will rise to 67. Eventually, it may rise even more. So if you are in your 30s now, you may be looking at a later retirement age in the coming years.
Next – and here’s the uncomfortable part – you need to figure out how long you are likely to live. Of course, no one can know this for sure. You may smoke every day and live to be 100 like your dear old granddad, or you may get hit by a car on your 67th birthday. The only thing you can do is figure out how long you are likely to live and use that for planning purposes. You can use a mortality calculator that considers your unique lifestyle factors, or you can just use the average lifespan in the United States, which is 79 years old. If you retire at 67 and will only live to 79, you need to plan to have about 12 years’ worth of income for your retirement.
Determine Your Needed Income
You won’t need to make as much money as you do now to support yourself in retirement – or, at least, that’s the idea. The general rule of thumb has been that you need about 70 percent of your current income during retirement. So if you make $100,000 a year now, you will need about $70,000 a year in retirement. Ideally, you would have your home paid off by then and you wouldn’t be supporting children or buying a lot of new things, like furniture and household goods. Therefore, you won’t need as much to live.
Look at how much you have in your current savings or retirement accounts, such as 401(k)s or IRAs. Now look at the rate of return on those accounts and compare that to the rate of inflation. That will let you know how much the money will grow and deplete over time. For example, you may have an IRA that returns an average of 6 percent each year, which you can compound over time to see how much you will have at retirement age. But then you have to subtract the 3 percent inflation rate each year to see how much that money will actually be worth in terms of spending dollars.
Determine Monthly Savings Amount
Once you know how much you are likely to have from your current retirement accounts and your social security benefit (assuming it’s still there when you retire), you can figure out the deficit between what you will need and what you will have. Then you can figure out how much you need to be saving every month to make up the difference. Even if you can’t save all that amount each month now, you can start putting aside a little and build up to the full amount when your income increases.
Whatever steps you can take to save for retirement now will save you a lot of heartache later. Use these steps to figure out exactly how much you will need.