Three Simple Steps in Order to How Much Income is Needed for Retirement

There is no better time than the present to start planning for retirement. Determining how much retirement income that one will need to live comfortably is a challenging task, however, income planning is a crucial part of understanding the amount of money that one needs in order to pay for expenses after retirement. Calculating retirement income is as simple as following the simple steps listed below.

Step 1: Calculate Current and Future Living Expenses

The best way to calculate current monthly living expenses are by going through bills for the past three months and using a spreadsheet to allocate costs according to different categories. For example, a simple expense allocation worksheet should have expenses broken out by; monthly rent, food, utilities, insurance, entertainment and transportation. However, everyone's monthly expense worksheet will look differently as everyone has different types of bills on a monthly basis. When retiring, it is common for people to expend less money than they did when working in their careers. Some reasons why people spend less money after retirement are:

Mortgages tend to be paid off

Less expense related to work related functions (gas for driving to work, parking fees, work lunches, after work functions)

Less child related expenses (assuming the retiree has children)

Reduced debts

Reduced taxes due to lower income production

A good way to determine future monthly expenses is by going to the CNN.com website and using their retirement expense calculator. The retirement expense calculator will allow the user to input estimated current expense and will produce estimated future expenses based on an assumption of a 3% inflation rate.

Some future retirement expenses that need to be taken into consideration are:

Amount of desired travel that is anticipated after retiring

Relocation costs if planning on moving closer to extended family - note that different areas of the United States have higher cost of living

Overall health condition of family members (husband and wife)

Foreseen medical expenses

Step 2: Determine Monthly Income after Retirement

Once all estimated monthly expenses after retiring are added up, it's time to estimate the amount of years that one will be retired. Basically, determine the ideal age of retirement and add on all the years that one will be retired. Determining life expectancy is not a fun realization, but it is a realistic fact that will help determine the amount of money needed in order to have a comfortable retirement. Adding up the amount of monthly income collected from social security, investment accounts and savings is the next step that should be taken into consideration. Learn what type of tax penalties will be applied for drawing out retirement funds before they mature. Adding up all retirement accounts and social security amounts will give one a general understanding of the amount of money that has been saved up for retirement. Develop an estimate up all monthly income from retirement accounts (IRA, mutual funds, stocks, pensions), social security benefits, and other miscellaneous income. Remember to divide the amount of monthly income by one's expected life expectancy.

Step 3: Compare Estimated Monthly Retirement Income to Monthly Future Retirement Expenses

This is the step where everything comes together. Compare the total monthly income expense to the future monthly retirement expense and see whether or not the estimated monthly income covers the retirement expenses. Do not fret if the income does not cover the expenses. Remember that this is just an estimate and that this is a benchmark on which income can be added onto. Many people who retire enjoy working part-time jobs as a way to earn additional income as well as giving themselves something to do during the day. Obtaining a part-time job is a good way to fill in the expense gap and will also allow the retiree to have additional income for more entertainment expenses.

Additional Notes

Remember that it is never too early to start thinking about retirement. Asking an employer to save a certain percentage of income from current monthly paychecks is a great way to save without having to expend a lot of effort. Try to utilize employer retirements plans and draw out as much money from a monthly paycheck as possible to receive the maximum amount of benefit from an employer retirement plan. Remember that Social Security benefits will not provide enough income to retire off of and to seek out additional income sources when planning for retirement. Researching retirement savings accounts should be on anyone's "to do list" and gaining knowledge about different types of retirement accounts will allow one to diversify their savings into different investment categories. Remember to consider tax implications when investing in certain types of investment accounts as some investments will have large penalties for drawing funds out earlier than the mature date. Lastly, talking with a financial planner is a great way to develop a retirement plan and to better understand the options available for future retirement savings.

Sources:

John P. Greaney. "The Retire Early Home Page." Retire Early Home Page