Calculate How Much Money You Need to Retire

Whether you've reached middle age and you are just now starting to wonder if you are going to be able to retire comfortably at a reasonable age, or you're one of those few people in your 20s or 30s who's already thinking about retirement, you need to crunch some numbers in order to make it happen.

Steps

 * 1) Calculate your current living expenses. The income that you would need to live off of after retirement is approximately 65-70 percent of the income that you live off of while working.  However, this rule of thumb may not be accurate since people are living longer than ever and retiring in good enough health to incur additional expenses (travel, entertainment, and so on). Your estimate will likely go up if any of the following assumptions don't apply in your situation:
 * 2) *Your house will be paid off (no rent/mortgage).
 * 3) *No work-related expenses (commuting, business attire, eating out for lunch).
 * 4) *Social Security will replace 45 percent of income for middle-income Americans. Example: Social Security will replace 43 percent of the income earned by the single-earner couple that makes $60,000.
 * 5) *Your children will be financially independent.
 * 6) *Fewer taxes because of lower income.
 * 7) *No debt.
 * 8) Adjust your desired retirement income. If there are any additional major expenses that you anticipate during retirement, you will need a higher income to cover that. On the flip side, you may be able to cut costs dramatically by changing your lifestyle upon retirement. Consider the following factors in determining how much you need annually during retirement:
 * 9) *Are you going to want to travel? If your family isn't nearby, you'll need to consider the cost of flying or driving to visit. If you'd like to go sight-seeing, perhaps cross-country or internationally, you'll need to increase your income to account for this.
 * 10) *Will you relocate to an area with a low cost of living? Many people seek retirement destination where the cost of living is low, usually where the weather is forgiving and the economy is mid-paced. If you sell your house in a pricey area, you can buy a house in a less expensive area and add the difference to your retirement fund.
 * 11) *Do you anticipate significant medical expenses? If there is any debilitating disease that requires costly medical treatment running in your family (or in the family of your spouse) it's a good idea to assume the worst and have money set aside to cover these potential expenses.
 * 12) **There are also various forms of insurance policies to consider, particularly those that cover health related costs not covered by Medicare. The cost for prescription medications can be exceptionally high, especially as you grow older and become more likely to need medications.  The point is, don't ignore or underestimate the cost of maintaining your health during your retirement years.  Whether you elect to self-insure these costs (putting extra aside) or purchase insurance, the costs for maintaining your health can be surprisingly high - just ask those you know who have already retired.
 * 13) *Will you still be working when you're retired? Some people look forward to never having to work again, but others would like to continue working, just on their own terms (part-time, flexible schedules, not worrying about needing a high salary). A part-time job or business can supplement your retirement income, but you need to ask yourself if you can reliably get work, for how many years in your retirement can you work, and how much money you can expect to make from such a job.
 * 14) *Are there any pensions or trust funds you can count on?
 * 15) Tack on the cost of inflation. Every year, life gets a little more expensive, so what sustains you in your first year of retirement may not be enough in your tenth year of retirement. Moreover, if you still have a good ten or more years before you actually retire, you'll need to account for the effect of inflation before you retire as well. For example, if you make $100,000 a year and you followed the previous steps and determined you'll need $65,000 a year in retirement, but you're not retiring for another 15 years, by that time $65,000 won't really be enough. Assuming an inflation rate of 3%, you can calculate how much more money you'll need each year by multiplying the previous year's income by 1.03. The assumption of an inflation at 3% is not realistic however.  Central banks are expanding the money supply at double-digits rates.  International Forecaster reports current US inflation at 12.5%..
 * 16) Estimate how long you'll be retired. Think about at what age you'd like to retire, and how long you think your retirement will last. That's a nice way of saying that you need to think about how long you'll live. It's not an inappropriate question to ask yourself; it's a practical one if you want to live joyfully until that day comes. Knowing how long you can expect to be around after you retire can help you when it comes to preparing. There are life expectancy calculators  that can give you a 'guestimate' on how long you can expect to live, which could feasibly help you prepare for your retirement.
 * 17) Make a plan. The simplest way to think about retirement is to add up all the money you'll need during all of your years of retirement, and save up that much--but for most people, that goal is way out of reach. Another way to approach it is to build a retirement fund that you can draw enough interest and principal from to sustain you through retirement. It's actually very complicated business to determine what kinds of investments will generate the income you need (and it's beyond the scope of this article; get in touch with a financial advisor) but now you have a much better idea of how much money you'll need per year when you're retired. A good rule of thumb is to start setting aside 15% of your gross annual income just for retirement until you can develop a more reliable plan with a professional.

Calculating for Inflation in Retirement with MS Excel

 * 1) [[Image:Inflation1_211.jpg|thumb]]Make two columns: year and retirement income. Write the current year and the year after that below it. In the retirement income column, put your estimated retirement income needed (around 70% of your current income) on the first line.
 * 2) [[Image:Inflation2_212.jpg|thumb]]Select both years.
 * 3) [[Image:Inflation3_758.jpg|thumb]]Click on the little black box on the lower right hand corner of the selection and drag it down as far as you want to go. This should populate the column with consecutive years. It's important that your initial selection is of two values, one year after the other, so that the pattern can be continued.
 * 4) [[Image:Inflation4_542.jpg|thumb]]Click on the cell just below the income value. Enter the equal (=) sign. Click on the income value above it (it should get a moving dashed border when you do this) then type "*1.03" and press enter. What you're doing here is telling the computer to find out what you'll need the next year assuming a 3% inflation rate.
 * 5) *[[Image:Inflation5_315.jpg|thumb]]A number should turn up in that cell that's slightly higher than the amount above it. If you want to tweak the inflation rate, you can use 1.04 instead for 4%, 1.05 for 5%, etc. A more realistic number should be 12.5% if you live in the US.
 * 6) [[Image:Inflation6_682.jpg|thumb]]Click on the cell with that you just added the formula to, and click and drag the little black square on the lower right. Drag it down as far as your years go and the formula will be transferred accordingly. For each year, you'll now see how much money you'll need in retirement. If in 2008 you're living off of $93,000 annually, you might estimate your retirement income to be $65,000 (assuming no Social Security payments). But what if you don't retire until 2020? At that point you'll need $92,674--almost as much as your entire income of 2008!

Tips

 * It is never too late to start preparing to retire. Yes, you should start when you're in your 20s, but life happens!
 * Do not rely on Social Security benefits.
 * To get a better idea of how close you are to comfortable retirement, calculate what your 'net worth' is.
 * Investigate all of your resources;
 * AARP
 * Your public library
 * SCORE (if you are a business owner)
 * If you can, plan for setbacks to your retirement savings plan, such as periods of unemployment or paying for higher education for yourself or your children. If you don't dip into whatever excess you have saved up, you'll come out that much ahead.  If you do, you'll still be on track for retirement.
 * Learn about retirement savings plans. Different plans have different advantages and disadvantages, particularly when it comes to relative risk, return, and tax consequences.  Do your homework and talk to a financial planner if you need to.
 * Remember that a well-invested retirement savings can continue to earn interest or dividends at a lower rate as you draw it down, but don't count on a steady rate of return. As you near retirement age, plan to reallocate your portfolio to reduce your risk and increase stability.  You can still keep a portion in higher-risk investments, but set aside the amount you'll need to live on.
 * If you have a retirement savings, you should also give some thought to who will inherit it if you die. Dying intestate (without a will or trust) can mean that your heirs inherit costly tax consequences, and that who your heirs are will be determined by the laws of succession rather than by you.

Warnings

 * Don't trust in your social security benefits to always be there. There is no telling what the future will hold for you or your finances. Let it be a cushion.

Related Tips and Steps

 * How to Retire in Your 30s
 * How to Retire with Security
 * How to Plan Your Retirement
 * How to Buy a Variable Annuity to Supplement Your Retirement Income
 * How to Apply for Social Security and Retirement Benefits