No magic formula or even regular formula will help you calculate the exact amount of retirement savings you'll need. Each person's financial situation and retirement plan will necessarily differ. However, there are several important considerations you must make regarding your estimated future expenses that can help you to determine what you should be saving. The average amount of money needed for living expenses after retirement is 80 percent of your gross (before taxes) income, and so it is recommended you use this amount as a baseline and determine whether you'll need to save more or less for your retirement.
Determine 80 percent of your gross annual income by multiplying your income by 0.8. Write this number down to use as a reference point.
Decide when you are going to retire, and try to plan for at least 10 years after that. If you are planning on retiring before the normal retirement age of 65 as defined by the Social Security Administration, you will need to plan for additional years. Multiply the figure you calculated in Step 1 by 10 to determine the general amount of money you will need.
Envision your retirement, and consider carefully what you plan to do once you are retired. For example, if you plan to travel or build up your wine collection or anything else that you do not currently spend a large amount of money on, then you will need to factor in estimated costs of those activities.
Go through your current expenses and determine which of those you will continue to incur after retirement, and if there are any new expenses that may be added. For example, if your employer currently pays for your medical insurance, that will be a new expense you will pay after retirement. Conversely, your mortgage or vehicles may be paid off by that time and so you will not have those expenses.
Identify any assets or positives you may have to utilize. For example, determine whether your mortgage will be paid off by the time you retire and will you have equity in your home. Determine whether you or a spouse have a pension or continue to receive medical or health benefits at little or no cost, such as veteran's benefits. Sum up all of the assets you may have and decide if you want to consider these as supplementary income with regards to retirement planning. Otherwise, you can subtract this amount from your overall retirement needs as calculated in Step 2.
Carefully review all of the information you gathered, as well as your ideas regarding your life after retirement. Determine a yearly retirement income based on all of this, and again multiply by 10. This will be the amount you'll need to save for your retirement.
- "The Everything Retirement Planning Book"; Judith R. Harrington & Stanley J. Steinberg; 2007