Whether you're just getting started in your career or are already a seasoned pro, your first step in planning for retirement is estimating how much you need to save.
How to Save for Retirement at Any Age
Use Retirement Calculators
Retirement calculators, available on the internet, in software programs, or through financial representatives, can help you make some estimates. To use these calculators you'll need to gather your financial records and make some key projections and assumptions.
Keep in mind that even the most sophisticated retirement calculators can only provide an estimate of your needs. None can take into account all the possible variables that can affect your results.
Your results will change based on your actual investment returns, actual inflation rates, tax law changes, changes in Social Security, and how long you live, among other things. The more realistic you are in your inputs, however, and the more informed your decisions, the better your estimate will be.
Gather your information
For starters, review your annual Social Security statement for information about your estimated retirement benefit. If you're covered by a traditional pension plan (the kind that promises you a specified monthly benefit at retirement), also review your total accrued and vested benefits.
If you're planning to retire soon, also check with any former employers about benefits you may have left behind, and remember that most private pensions don't provide inflation adjustments, so your monthly benefit is fixed once you retire. Consequently, you'll have to replace the decreasing purchasing power of your pension payments with another source, most likely your savings.
Estimate Your Retirement Expenses
Once you've gathered information about your Social Security benefit and any pension benefit, you're ready to estimate your retirement expenses. If your retirement years are still far off, you can simply use a percentage of your current expenses to estimate how much you need to save. If retirement is fast approaching, or you want a more accurate estimate, you can project your future expenses in more detail.
The standard advice is that for each year in retirement you'll need about 70% to 80% of your pre-retirement expenses (adjusted for inflation). But with longer life expectancies and more active retirement lifestyles, these traditional formulas may leave you short. So you may want to use a higher percentage.
Keep in mind that even if your kids will be out of the house and your mortgage will be paid off, other costs will increase to offset these savings, such as medical and dental expenses, long-term-care costs, and property-tax bills. What's more, your travel, recreation, and entertainment costs may go up.
You may also have big-ticket expenses, such as gifts to family or charities, care for aging parents, or home repair or remodeling costs. If anything, overestimate for unexpected spending and factor in annual increases in the cost of living between now and the time you retire, as well as throughout retirement.
Project Your Life Expectancy
One of the key projections you'll need to make is how long you expect to live. According to the National Center for Health Statistics, on average today's 65-year old women are projected to live to be about age 84, and today's 65-year old men are projected to live to be about age 81.
These are only averages for the entire population, however. So personalize your estimate based on your current age, health status, and family history, and then consider adding five to ten more years to that.
Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.