How to Estimate Your Retirement Benefits

Estimating your retirement income is a useful exercise when you are preparing a financial plan. The process can be a little intimidating, since it requires many assumptions. Nevertheless, it is worth the effort, since it can give you an indication as to whether your retirement planning is on track or needs adjustment. Here are five steps for estimating your retirement benefits.

Estimate Social Security Income. If you expect to qualify for Social Security retirement benefits, then your first step should be to calculate what you will receive from this program. This is relatively easy to do, since if you have enough credits to qualify for Social Security benefits, there is a retirement estimator at www.ssa.gov that will calculate your benefits for you. Among other information, you will have to input your Social Security earnings for the past year. The estimator's calculation of future Social Security benefits is based on the assumption that your future annual earnings will be the same as your earnings in the most recent year. If you expect your earnings to be higher or lower in future years, you can adjust the figure you input for the most recent year to see how higher or lower future earnings might affect your benefits.

Estimate Retirement Income from Pensions or Other Sources. If you expect to have retirement income from pensions or other retirement benefits plans estimate this income. The Human Resources department from the company or organization that sponsors your pension may be able to help you with this calculation. Also, if you work or worked for a state or local government, they may have an online calculator that you can use to determine your benefits. In addition, estimate income you expect to have in retirement from other sources, such as income from a rental property or an annuity.

Project Your Retirement Account Balance. To estimate your retirement account balance when you retire, you'll have to make several assumptions: at what age you will retire, how much you expect to contribute to your retirement account until you retire, and how much you expect to earn on your retirement account balances. Given the uncertainty that results from having to use so many assumptions to arrive at a retirement account balance, you might want to use three estimates, one based on relatively conservative assumptions, one based on what you believe to be the most realistic assumptions, and one based on relatively aggressive assumptions, so that you arrive at three figures: a worst case, a most likely and a best case result.

Estimate Your Retirement Income from Your Retirement Accounts. Once you have estimated how much you will have in your retirement accounts when you retire, determine how much you expect to take out of them each year after your retire. Some experts recommend taking no more than 4% annually out of retirement accounts, so this could be a good starting point for your estimate.

Total All Income Streams. Total all your income streams from Social Security, pensions, retirement accounts and other sources to arrive at your total retirement benefits.

If you repeat this exercise at least every few years, if not annually, you will be able to make adjustments as necessary to be sure that your retirement plan is on track.

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