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How Do You Determine Retirement Needs Accurately?

Here are the U.S. statistics on how workers plan for retirement:

  • 3% don’t have any idea
  • 47% do their own calculations or use a financial adviser
  • 50% just guess

To help you avoid guessing, I offer two different ways to approach how to calculate retirement needs accurately.

First method:  

  1. Estimate how long your parents and grandparents have lived.  Average the results.  This gives you a fairly accurate age you can expect to live.  In this example, let’s say it’s 83.
  2. Determine the minimum income you will need to live comfortably.  Let’s say it’s $3,000 per month.
  3. Subtract what Social Security is slated to pay and any pensions or other monthly income you can count on. In our example, let’s say it’s $2,000 per month. That leaves $1,000 per month you need on top of these payments for retirement.
  4. Subtract your age at retirement from age 83. In our example, this means you will need $216,000 for retirement.
  5. Divide the total amount needed to be saved by the number of months you have between now and the time you retire and this will give you a fairly accurate amount you need to be saving monthly.  In our example it looks like this:

Math: 65 (retirement age) – 40 (current age) = 25 years left to save; multiple 25 years x 12 months = 300 months; divide the 300 months you have between now and the time you retire by the total amount you need to retire of $216,000 = $720 per month you need to be saving

Second method:

  1. Calculate where all of your income might come from, and then build a spending plan around that amount.  For example, if you will receive $1,850 a month from Social Security, and $400 a month from a pension, along with $800 a month from a rental property, then build a spending plan around $3,050 per month of income.
  2. Adjust your plan to take into consideration variables that you cannot foresee right at the moment. For example, what if you live to age 89 and not age 83, or if you get sick and need medical care costing $23,000? Be thinking about unknowns and build some extra money into the spending plan to allow for them.
  3. Build into the plan how to pay for such things as the following:
  • Long-term care costs
  • Liquidity for emergencies
  • Inflation

If all of these factors require you to work longer than expected, it is better you know today and not find it out in 25 years! For specific help contact me at peter@moneymastery.com.

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