As you go through your life, planning for your future is crucial. A retirement savings plan is a must these days. Social Security can not be relied on as was once the case. Taking the steps to guarantee your comfortable retirement years is an essential part of your life.
Hopefully you have put money away in a 401k, a Roth IRA or invested your money in other sources of passive income. Once you have determined the age at which you would like to retire, it’s time to decide if you have enough money to do so at that time. The question changes from “How much should I save to be able to retire?” to “How do I know if I have saved enough money for retirement?”
Calculating How Long Your Retirement Income Will Last
To determine if your nest egg is going to be big enough, you will need to follow a few crucial steps.
1. Calculate your expenses.
How much you will be paying out each month is going to vary for every individual. You will need to consider your anticipated housing expenses and typical monthly expenses like food, utilities, health insurance and other essentials. If you are hoping to live a better lifestyle than you currently are, you are going to need to estimate additional costs.
If you are currently living on $5,000 a month but hope to move into a more expensive area you will need to increase that amount. A wise figure would be to increase that by 20-30%. In this case your estimated monthly expenses would be about $6,000-7,000. Multiply that by 12 to determine your yearly expenses. Factor in an average of a 4% inflation rate as well and you will have an estimated yearly cost of living. As you are doing your calculations that some of the money you are spending on a monthly basis today is associated with going to and from work. You will be able to cut these costs out during retirement.
2. Calculate your retirement portfolio.
Add up all investment accounts as well as on-hand cash savings accounts. Allow yourself an amount for economic down-turn or for miscalculations. Again, a wise amount would be to subtract 20-30%.
For example, if your portfolio is estimated at $1,000,000, you will want to subtract $200,000 to $300,000.
3. Divide your total portfolio dollars by the yearly figure in Step 1.
Using the examples above, if you have valued your investments to be equal to $800,000 and your yearly expenses to be $60,000 your current retirement plan will last you just over 13 years.
4. Consider extra revenue you will be receiving.
Will you be receiving Social Security or pension benefits? Do you have rental income from real estate? This revenue will extend the life of your investment portfolio. Consider the following example:
You will be receiving a pension benefit of $15,000 per year and a Social Security benefit of $20,000 per year. Your yearly income from those two accounts will be $35,000.
If you have a projected yearly cost of living to be $60,000, subtract the $35,000 income from it. You will now need to supplement your income by just $25,000. This now extends the life of your investments to 32 years.
Additional considerations
It is important to remember that your retirement can last for decades. With the average life expectancy holding around 75 years old, it is reasonable to expect you will be in retirement for at least 10 years (assuming you retire at 65). Those numbers can drastically change. More than half of the population will live beyond 75. With the improvements in medicine and the focus on being healthy, that number of 75 could be on the low side. If you are one of those individuals who will be living into their 80s and 90s, you will need to plan for a longer retirement.
It is also important to consider ensuring continual revenue sources. That is to say, you may want to consider investments opportunities that will continue to make you money. Such options include real estate, a small business and investment funds that you continue to invest in. The importance is in making sure you have enough revenue and funds to ensure a comfortable retirement, no matter how long it lasts.
The earlier you start saving in life, the great these amounts could be. It is always wise to start saving as soon as you can. Hopefully you have started as soon as your schooling has ended. However, it is never too late to start saving for retirement, you will just need to save more each year, the closer you are to retirement.
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