Figuring out the amount of money you will need for a comfortable retirement is a difficult calculation to make. There are a lot of unknowns that must be estimated to come up with a reasonable number and even then, you cannot be sure if the number you reach is too high or too low. To determine how much money you will need after you retire, there are several different methods you can use. Here are some of the most common ways to estimate how much money you will need for your retirement years.
Income Replacement Method
Many people determine the amount that they should be saving for retirement by figuring out how much money it would take to replace what they are making as their income. The most common rule of thumb used is that you should save enough to replace 80% of your current income to maintain your present quality of life. This method is most effective if you believe that your income will remain fairly steady until you retire and you can live comfortably on the amount that you are making now. However, if you are currently increasing your debt to maintain your lifestyle, this method may not be effective for you.
Expense Estimation
Another method of predicting the amount that you will need for retirement is to estimate the amount of the expenses you will have to pay after you retire and save enough to cover them. While it may be easy to come up with a number based on your expenses today, this method fails to take into account a number of variables, like inflation, your life span, and potential medical expenses. If you use this method, be sure to tack on at least 30% for unexpected expenses and inflation. It is better to aim too high than to find yourself running out of money after you have retired.
Contributing The Maximum
Instead of trying to estimate how much money will actually be needed for retirement, some people simply plan to contribute the maximum amount to their IRA and 401k retirement accounts each year. While this is a good strategy for most middle income earners that do not expect their lifestyle to change much during their retirement years, it may not be sufficient for those that live an expensive lifestyle or live in an area where the cost of living is high. In addition to maxing out their retirement plan contributions, these individuals may need to find a way to supplement their retirement savings with other income sources.