Five Tips to Help You Figure Out How Much to Save for Retirement
As we get more comfortable with our finances we’re looking for ways to improve our system and that includes our retirement plans.
So far we’ve been basing our plans on an estimate we did a few years ago. After reading some books on determining a better calculation for how much one needs for their retirement nest egg, I decided to refine our plans.
It’s helped us to feel more prepared for the eventual day when we both retire from our careers. If you haven’t checked your number recently, I highly recommend it.
Even if you’re off on your estimates, having some goal to work towards can be incredibly effective as motivation to get started and stay on your plan.
Here are five tips to help you estimate how much you’ll require at retirement:
1. Looking Beyond the Basics
If you’re trying to find the superficial numbers, there are several questions you need to think over and answer realistically.
- How much income do I need for retirement?
- What is a ballpark figure that can be used for life expectancy?
- How much will my company pension and social security pay during retirement?
2. How Much Income Do I Need?
One of the most common rules of thumbs given with retirement is that you need to plan for needing around 8-10 times your current annual income.
While it’ s convenient to have something to base the figure on, I think this doesn’t consider changes in your expenses at retirement.
When estimating, try to consider what will be different from your current expenses when you retire? Will you have a mortgage to pay? What do you think your health insurance and medical expenses will be? Will you be helping your children with college?
3. What is a Ballpark Figure That Can be Used for Life Expectancy?
This is probably the most uncomfortable question to address as most people don’t like talking about their own mortality. According to Social Security Administration’s life expectancy calculator, my life expectancy is 85-89 years old and my husband is 82-87 years old.
While predicting the future is impossible, getting some idea of life expectancy lets us know that we need to plan on having our nest egg lasting a couple of decades.
4. How Much Will Social Security Pay During Retirement?
One huge question that Generation Y and Millennials have to answer is whether or not they will include Social Security as a part of their retirement plans.
While there are those who think it will not be around when it’s time to quit, most people figure there will be something, even if it’s much lower than current amounts.
For us, we’ve decided to not include Social Security in our plans and instead count it as a bonus should we get it.
5. Refining Your Retirement Plans
Looking over the numbers, I see that we need to increase our retirement contributions for our Roth IRAs. We’ll have to review our budget later this week and see how we can optimize our budget so we can get closer to reaching the annual contribution maximum of $5,500 each (we’re both under 50).
How many of you have calculated how much you need to have for retirement? How did you get figure that amount? For those already retired, what expenses did you over and under estimate?