Planning for a comfortable retirement takes many years, and one of the primary challenges is determining exactly how much you need to live a good life after you stop working. There is no one answer to this important question, since everyone's individual needs are different. Understanding your own income needs will help you determine how much you need to retire comfortably.
Build Your Budget
Your retirement budget is a critical part of your financial planning. You can use your current budget as the basis for your retirement budget, but you need to make some changes and some adjustments. Start your retirement budget planning by looking at what you are spending right now, then use that to build your retirement budget. Keep in mind that some of the big-ticket items in your budget, like your mortgage payment, might not be a factor when you retire. Other items, like your health care spending, are likely to go up.
Saving money for retirement is certainly important, but in many cases your retirement account will not be your only source of income when you leave your job. When determining how much you need to live comfortably in retirement, you need to consider other sources of income as well, including Social Security and any pension you expect to receive. Each year you receive a statement from the Social Security Administration that shows how much you have earned and what your estimated benefits are likely to be. Keep those annual statements in a safe place, and use them as part of your retirement planning. If you can't find your statements, you can work up a quick benefits estimate on the Social Security Administration's website.
Determine Your Shortfall
One of the best ways to determine how much you will need to save for retirement is to use your proposed retirement budget to determine your projected shortfall after pension and Social Security payments. Add up all of the sources of guaranteed income you can depend on when you leave your job, and compare that monthly figure to how much you expect to spend. The shortfall you find can help you determine how much you need to save for your golden years.
The withdrawal rate you use in retirement can have a profound impact on everything from how long your nest egg lasts to how much you need to save to live comfortably in retirement. Many financial planners warn their clients to not exceed a 4 per cent annual withdrawal rate in retirement because withdrawing more money could deplete that nest egg too soon. That means that if you need to generate £26,000 in annual income from your nest egg, you would need a starting balance of £0.6 million. Of course if you have other sources of income in retirement, like Social Security and pension income, you need less in retirement savings to generate a total of £26,000 in annual income.