In our previous blog post we wrote about questions you need to ask yourself when preparing for retirement. These questions will help set you on your path towards retirement planning.
However, the most important question to ask yourself is “how much money will I need to retire?”
Calculating this amount depends on a handful of factors. Let’s take a look at each of them in detail so you can figure out how much money you need to retire comfortably.
This amount can vary wildly depending on your lifestyle but many people estimate that you’ll need about 75% of your pre-retirement income to sustain you once you’ve retired.
Of course it’s hard to say what your expenses will be once you’ve retired but it’s safe to say that 75% of your pre-retirement income will be enough to sustain you each year since it’s not likely that you will completely stop earning income once you retire.
Many retirees still earn some form of income once they’ve officially retired, usually from investments or part-time work.
Keep in mind that you should also be receiving a government pension as well so it’s safe to say that 75% of the amount you are currently earning will be enough for you to live off of each year in retirement.
Based on your current lifestyle and spending habits do you think that you will need more or less money each year while in retirement? Will you have a mortgage or car payment? Will you travel more or less once you’re retired?
These are all great questions to ask yourself, and it’s important to be honest with yourself when making this estimate.
Once you’ve decided on an amount that you need every year in retirement you should take a look at the the next factor in the calculation.
Retirement age can also vary depending on your situation. For example, in the United States the age of retirement is about 67 depending on when you were born.
In the United Kingdom the retirement age is 65 but will increase in the coming years.
The age that you plan to retire at is important for two reasons.
First, it will help you calculate how many years you have to work in order to contribute to your retirement account. Second, it will help you calculate the number of years that you will be retired which brings us to the next factor for calculating your retirement savings.
Number of Retirement Years
While it’s impossible to know which age you will pass away at you still need to estimate how many years you’ll live beyond retirement in order to save accordingly.
Interestingly your life expectancy may vary depending on your sex, race, and the country you live in. For example, the life expectancy of a male in the U.K. is about 87 years old.
So for the sake of planning it may be helpful to look up what those life expectancy statistics are for your personal situation.
As you can see there are a lot of variables to take into account when calculating how much your nest egg should be.
You need to consider how much money you will need each year in retirement multiplied by the number of years you hope to be alive after you’ve retired.
So, as an example, if your current income is $100,000 per year and you plan to retire at the age of 67 with an estimated life expectancy of 87 then you would need approximately $1,500,000 in retirement savings.
Keep in mind that this is a very simplified calculation that doesn’t include inflation or taxes. And, while it’s not the most scientific method for calculating how much to save for retirement, This calculation can act as a rough guide to help you reach your goal.