If the question “How much will I need?” haunts your sleep, get out of bed, grab your notebook or computer and face those fears by asking yourself three other questions:
1. How much am I spending now?
Many will stop right here and switch on Netflix — too much reality for 3 a.m. But an accurate picture of how much you spend and save now shapes or shatters any retirement fantasy. Creating a budget is a key first step. If you do this, you will already put yourself ahead of the pack: A 2013 Gallup poll found only 1 in 3 Americans keeps a detailed written or computerized monthly budget.
Keep it simple for now and tally only your monthly expenses. Start with your fixed monthly costs, such as housing, phone, car and student loan payments. Then find the monthly average of variable expenses like credit card bills, utilities, food, clothing and entertainment. Add those together, and you have a picture of your spending.
2. How much will my retirement savings grow?
Now factor in your current and projected income and retirement savings. For this, drop the pen and use a retirement calculator, which makes assumptions based on inflation projections, life expectancy and market returns. You’ll need to know your current income and savings, including the value of your employer-sponsored 401(k) or any individual retirement accounts.
Over a long time horizon, history shows that a diversified growth portfolio can return an average of 6% to 7% annually. Compound interest can help fulfill your long-term savings and investment goals, especially if you have time to let it work its magic. For example, if you put $5,500 a year in an IRA that averaged 7% annual growth, in 25 years your savings would have grown to more than $400,000, including almost $260,000 in interest.
Our Retirement Calculator
- Calculate your retirement needs
- Get a monthly savings goal
- Estimate your age at retirement
3. How will my expenses change?
A basic retirement calculator may first display how much you’ll need to save to maintain your current lifestyle, but that rarely remains static — and often declines as big-ticket loans such as mortgages are paid off.
Dip into the advanced functions of the calculator to tweak variables, especially expenses. A common rule of thumb says expenses in retirement will be between 70% and 90% of what you earned annually in the 10 years leading up to retirement. Several current expenses may disappear, most notably payroll taxes and retirement savings contributions; if you’re saving 15% now, your post-retirement expense load just dropped to 85%. After tweaking your expenses, you now have a monthly goal for retirement savings.
A written retirement plan that you revisit annually will help you sleep at night. About half of people surveyed who do this exercise felt very prepared for retirement, according to LIMRA, a financial services and insurance research association. Only 17% of people who don’t write a plan felt ready for retirement.