Planning for your retirement can be tricky – it’s hard to know what your expenses will be, and forecasting future income is complicated at best. Between inflation and changes in the economy, we understand how difficult it is just to figure out how much you’ll need in five years, let alone a decade or two.

Fortunately, with a little diligent effort, you can create a plan for your financial future. By learning how to calculate the amount of money needed for retirement, you can put together a comprehensive list of your expenses and more accurately assess your future income potential. You’ll also be able to prepare for changes in your financial situation that could impact your retirement plan.

Why You Need to Know How to Calculate the Amount of Money Needed for Retirement

how to calculate amount of money needed for retirement

Unless you’re quickly approaching retirement age, you may not be thinking about how you’ll live during your twilight years. You may even think you’ll do some part-time work through those years. However, retirement is more expensive than you think. In the U.S., retirement is a significant and costly event:

  • Though the average age of retirement is 66 and most people will live to be 79, retirement is likely to last much longer than that due to skewed data.
  • Most financial advisors will recommend that you replace 80% of the income you currently live on, and it’s unlikely that your Social Security benefits will cover that.
  • Assisted living facilities can cost about $4,000 a month, and almost 70% of people over 65 will need some type of long term care after retirement.

If you want to live comfortably – and without any unnecessary stress – you should plan for different circumstances. That means you need to budget for the years you’ll be active during retirement and for the years you may be in long-term care.

We know that thought can be overwhelming but learning how to calculate the amount of money needed for retirement is simple and doesn’t require a lot of time.

How to Calculate the Amount of Money Needed for Retirement: 3 Simple Steps to Creating a Budget

To get the most accurate financial plan for retirement, you need to explore every aspect of these three simple steps.

1. Start by Figuring Out Your Expected Expenses

The first thing you need to determine is how much it will cost you to live after you retire. Though financial advisors will have different recommendations on how to calculate this based on your current expenses, it’s a good idea to list out the things you know you’ll pay for. That should include:

  • Housing
  • Utilities
  • Transportation
  • Healthcare
  • General living expenses
  • Entertainment

The more detailed your list of expenses, the better your financial plan will be.

2. Create a Forecast of Your Potential Income

One of the hardest parts of figuring out how to calculate the amount of money needed for retirement is forecasting your potential income. Even if you have a stable source of income now – and a plan for keeping that income – things can change. Potential income can come from sources like:

  • Social Security Income
  • 401k and IRA plans
  • Employee or government pensions
  • Investment dividends
  • Full- or part-time employment

Put together a comprehensive list of income sources you expect to have.

3. Anticipate How Your Income and Expenses Will Vary

After you have a list of your potential income and expenses, you need to figure out how to adjust that plan as your situation changes. Depending on how old you are when you start planning for retirement, there are a number of circumstances you should prepare for, including:

  • Changes in employment status
  • Negative impacts on investment accounts
  • Emergency financial expenses
  • Changes in living standards
  • Economic downturns

You need to consider how changes to your current situation will impact your retirement plan.

How Much Money Do You Need to Retire Comfortably?

The short – and less-than-satisfying – answer is that it depends. What you consider comfortable now may change, and the cost of that comfort will almost certainly fluctuate over time. A simple approach is to figure out how much you think you’ll spend each year and multiply that by 25.

This will give you a comfortable amount to withdraw from during retirement that is adjusted for inflation. Use these tips to figure out how to calculate the amount of money needed for retirement:

  • Don’t skimp on travel and entertainment expenses. If you don’t work during retirement, you’ll have plenty of time on your hands.
  • Look into long-term care facilities ahead of time. This will help you budget for a comfortable stay in an assisted living facility.
  • Consider how to maximize your retirement fund. Continuing to invest while you’re in retirement can maximize how much you leave to your estate.

With the right planning, you can easily determine how much money you need to retire comfortably.

Want to know how you can prepare for a comfortable retirement? Contact Mooney Lyons to get started on your financial future.