It is estimated that two out of three people do not save properly for retirement. Retirement can become a scary time in an individual’s life, if you do not have enough money to cover monthly expenses.

Retirement is supposed to be a time period in one’s life where you get to make your own rules - no more early rising to fight rush-hour traffic, no more answering to your boss, no more working overtime.  However, if you do not plan for your retirement needs, you will be met with an additional set of financial constraints and rules at a time when you will be less financially nimble.

During retirement, you should be able to do all of the things you had dreamed, but were pushed to the wayside because of time.  Some people use their retirement to travel around the world, while others start their own business or finally go back to school. Retirement should be your time. If you want to have a relaxing and enjoyable retirement, you need to plan ahead. In fact, accumulating wealth is really only important to provide for your retirement or periods when you can’t otherwise work. Your retirement wealth is the fruit of your actions and lifestyle during your productive years.

What are your retirement financial needs?

What is the difference between your current monthly expenses and your true financial needs upon retirement?   In order to save for retirement, you must know exactly what your true financial needs will be. This will depend on income sources, monthly expenses, and what type of retirement plan you have.

When it comes to calculating your true financial needs, it is important to calculate the difference between what you truly need, versus what you want.  For example, the required or necessary financial expenses can include rent, groceries, utilities, car payment, health insurance, and more.  However, you do not necessarily have to eat lunch out daily, or stop at the pub for happy hour once a week.

When you are calculating your true financial needs for retirement, it is important to differentiate between your needs now and those of your retirement years. Remember, your life will change dramatically. You may not need to eat out as often nor will your auto expenses be as high. If all goes well, your kids will have moved out on their own and you will have paid off your mortgage. Conversely, you may intend to travel or pursue a hobby or other passion.

Calculating your retirement needs

There are several steps to take in order to accurately calculate how much money you will need to begin saving for your retirement. One approach to calculate your retirement needs involves:

• Calculating your rate of return, adjusted for inflation, on your current and expected savings and investments.  For example, if you have your savings in a CD generating 5% annually, but inflation on average has been 3% per year, then you obtain a real rate of return of 2%.

• Determine your retirement integer.  Taking the example used above, you would divide 1.00 by 2%, resulting in 50.

• Next, you would take your retirement integer and multiply it by your estimated annual expenses in retirement, and this will provide you with how much money you will need to sustain you from the date you retire throughout your lifetime.  Essentially, taking the example above, you would need to save $50 now for each $1 anticipated in retirement living costs.  Therefore, if your estimated annual expenditure in retirement is $40,000, then you would take $40,000 and multiply it by your retirement integer, which in this case would result in $2 million – which is how much you need to save before you retire.

Evaluating the calculation, it is easy to determine what variables impact the amount of savings you need for retirement.  For example, if you placed your savings into investment vehicles with higher returns, then your retirement integer decreases, allowing you to save less now per each dollar needed in retirement.  On the other hand, you could also decrease your annual expenditures in retirement, also decreasing the money you need to save now.

This calculation does not take into consideration your other sources of income during retirement, such as Social Security or inheritances.  It only calculates how much money you need to save now, including your employer sponsored defined contribution retirement plans, based upon your financial investments.  Nonetheless, it is always better to plan on the safe side, as it is a great perk to be able to have more than you need in your golden years!  

Use the retirement calculators to help you get a big picture view of your retirement needs. Determine your true financial needs and start saving today. Ensure a happy, stress-free retirement, in which you get to do the things you love, by planning ahead for the future.