One of the most daunting tasks of your financial planning will inevitably be figuring out how much you need for retirement. For most people, the foundation of financial planning for retirement begins with an annual income amount; however, where it goes from there depends on your individual circumstances.
Finding a Baseline
Perhaps the easiest way to determine how much retirement income you'll need is to take a close look at how much income you need presently. If your current yearly salary allows you to save and live well, it's safe to say that your yearly salary, adjusted for inflation, would be a suitable baseline income for your retirement. In other words, if you're living well on $50,000 per year now, then you should be able to live well in retirement on $52,500 per year, adjusted by 5 percent to account for inflation.
Where the Money Comes From
When people wonder how much income they'll need for retirement, often the answer they seek is actually how much of their retirement income they'll need to provide, either through investments prior to retirement, or through employment after retirement. Social Security will guarantee most retirees a small amount of income, as do pension plans offered by employers. For most retirees, however, the difference between what Social Security provides and the yearly income needed will have to come from investments.
Health Care Costs
If there's one wild card that no one can afford to ignore when it comes to retirement planning, it's the cost of health care. Considering that Smart Money's Catey Hill estimates that retirees will need approximately $295,000 to cover health insurance premiums and out-of-pocket expenses during retirement, knowing how your health care coverage will be paid for is an important determinant when figuring how much retirement income you'll need. Unless your employer offers health insurance benefits upon retirement, you're likely on your own, and even with Medicare, you're likely to pay several thousand dollars a year in out-of-pocket costs.
Forecasting Your Needs
One of the most difficult aspects of planning for retirement is anticipating your financial needs in retirement. There's no magic number. While the costs of health care are likely to increase, for instance, work-related expenses such as commuting expenses will decrease. Likewise, if retirement for you means living the simple life, downsizing and taking it easy, then you'll need less income than the retiree who plans to become a world traveler. Figuring out what you'll need for your retirement means taking a good look at what you'd like to do during retirement, and what you'll need to do it with.
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