To start your retirement planning, you will need to calculate just how much money you'll need to live on once you retire. Most financial planners advise that you will need 80 percent of your pre-retirement income to maintain your current standard of living. Then that amount needs to be adjusted over time for inflation.
If you are already nearing retirement age, this should be pretty easy to figure out. However, if you have many working years left, this may be more difficult to calculate as your income levels and living standards may not be fully defined at this time.
Here are some key questions to ask yourself:
- Does your employer offer 401(k) or any form of pension plan? If they offer a 401(k) is there a match? If they offer a pension plan, what are the terms and conditions? What is your current balance?
- Do you know how much you expect annually from Social Security? (Note: The Social Security Administration provides an annual statement of how much you are eligible for retirement. It typically arrives three months before your birthday each year.)
- Do you contribute to an IRA or some other tax-deferred savings plan? What is your current balance?
- What is the value of your taxable investments?
Once you total these amounts, you will have a good picture of what to expect in total from these sources. However, depending on how much time you have until retirement, it may be more difficult to estimate exactly how much you will have in both your tax-deferred and taxed savings plans.
You will also want to consider your real estate value and your mortgage balance. If you intend to sell or downgrade to a smaller home during retirement, you will want to consider this as well. Due to changes in the real estate market, it may not always be easy to determine the value of your home in the future.
Taking Action
Now that you know exactly what you have to work with and given your desired retirement lifestyle, it's time to take action. If you are coming up short, consider increasing your contributions to the max for your 401(k), IRAs, and other retirement savings plans. Now would also be a good time to speak with a financial advisor.