Depending on where you are in life, trying to anticipate your financial needs in retirement and determining how exactly to get to that point could feel like a daunting task, or even a task that doesn’t need tackling yet. In fact, according to a study completed by The Alliance for Lifetime Income, only 28% of non-retired Americans have attempted to estimate their retirement income. Not as intimidating as it sounds, read on to learn how to estimate those needs.

Start with Your Current Income

If you’re living within your means and not depending on credit cards to maintain your lifestyle, using your paycheck as a benchmark is a sufficient starting point. This, of course, excludes contributions to a traditional 401(k) account as well as health insurance premiums that are deducted from your gross pay. A common and simple approach, then, is to set your desired annual retirement income at 60% to 90% of your current income. However, it doesn’t take a financial expert to note potential flaws with this approach. What if, for example, you plan to travel extensively during retirement? Planning for 60% to 90% of your current income might not be enough to fulfill your jet setting goals.

Forecast Retirement Expenses

Your annual retirement income should be more than enough to meet your daily living expenses. Keep in mind that the cost of living will increase over time, and insurance and health care could fluctuate. Having said that, some common retirement expenses to estimate include:

  • Food and clothing
  • Housing (mortgage, homeowners insurance, rent, property updates, repairs, etc.)
  • Utilities
  • Transportation (car payments, insurance, maintenance, gas, repairs, public transportation)
  • Insurance (medical, dental, life, etc.)
  • Health care costs not covered by insurance (deductibles, copayments, etc.)
  • Taxes
  • Debts and loans
  • Recreation such as travel, hobbies, and dining out

What to Do with Your Projected Retirement Income Needs?

A standard rule of thumb when talking about estimating retirement income needs is to have 25 times your anticipated annual expenses saved up by the time you retire. This is assuming you’re planning for a 30-year retirement. Theoretically, you could then withdraw 3% to 4% of your nest egg each year.

If you’re lacking additional sources of protected lifetime income, such as pensions or annuities, you may need to tap into savings in order to bridge the gap between social security checks and what you’ll need to live on. You could also buy a simple income annuity to cover part of that funding gap. These payments continue for life, thereby removing some of the guesswork of estimating retirement income needs and providing peace of mind.

Peter McAllister, CPA