One of the hardest truths of retirement planning is that you’re never going to get it right. Just like today’s retirees never could’ve foreseen the pandemic and recession we’re currently living through, there will be surprises that come up for you in your senior years, some of which may cost you a lot of money you hadn’t budgeted for.

The key to successful retirement planning is not to get things exactly right, but to get as close as you can based on educated guesswork and to err on the side of estimating too high rather than too low. If you’re still not sure how much you need for retirement, you can follow the steps below.

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Estimate the length of your retirement

In order to estimate how long your retirement will last (and consequently, how many years of living expenses you’ll have to cover), you need to know when you plan to retire and about how long you expect to live. You can choose any retirement date you’d like to start with, but if after you crunch the numbers you realize your plan isn’t feasible, you may have to push back your retirement so you have more time to save.

As for life expectancy, it’s a shot in the dark, but you can use your family history and your own lifestyle to give you a starting point. You could also try a life expectancy calculator, like this one from the Social Security Administration. It doesn’t hurt to add a little cushion to your estimate, especially if you’re a healthy person. I always assume I’m going to live into my 90s at least. It may not happen, but I’d rather save extra money and pass it along to my heirs than outlive my own estimate and have no way to pay for my expenses.

Once you have these two pieces of information, calculating retirement length is as simple as subtracting your chosen retirement age from your estimated life expectancy.

Determine how much you’ll spend annually in retirement

Estimating your retirement spending is a little easier than estimating how long your retirement will last because you already have a baseline for your expenses. You know how much you spend monthly right now. Or if not, you could figure it out without too much effort by reviewing your bank and credit card statements. Calculating your annual expenses is as simple as multiplying that by 12 and adding a little extra for one-time costs.

Your retirement expenses won’t be exactly the same as your expenses today because your life will probably change between now and then. Caring for children may cost you a lot of money today, but by retirement, this usually isn’t something most people have to deal with anymore. You also won’t have to budget money for retirement savings while in retirement.

But other expenses could rise. Retirement usually brings more free time, which many choose to spend on hobbies, but that can also bring new expenses. You may also choose to donate more money to causes you care about in retirement, and you may have to spend more on healthcare.

You can use your current expenses as a baseline, but adjust each category of spending up or down based on how you think your spending will change in retirement. 

Estimate money from other sources

Though pensions aren’t as common today as they used to be, they still exist. If you have one, it can go a long way toward covering your retirement expenses, reducing how much you need to save on your own. 

Some employers also match their employees’ 401(k) contributions. This can also help you reach your savings goal more quickly, assuming you’re contributing enough to your 401(k) to earn the match in the first place.

Then, there’s Social Security. You can find out if you’re eligible for it and estimate your monthly benefit by creating a my Social Security account. This may not be perfectly accurate because the Social Security trust funds are projected to be depleted by the end of the decade, which could lead to benefit cuts. But the program is not going away, and even if you only get 75% of what you’re eligible for based on the current benefit formula, that can still add up to hundreds of thousands of dollars over your lifetime. 

Make note of money you expect from the above sources as well as any other streams of revenue you expect to have in retirement, like rental property income. These will help reduce how much you need to save on your own.

Put it all together

Once you’ve got all the pieces, you have to combine them to get an accurate idea of what you must save for retirement. You can’t just multiply your estimated annual retirement expenses by the number of years of your retirement because you also have to account for inflation. Most retirement savings formulas use 3% per year for this, but you could go even higher if you’d like to be conservative.

A retirement calculator is probably the easiest way for the average person to estimate retirement needs because it does a lot of the math. You just fill out the various fields with details on when you plan to retire, how much you think you’ll spend, how long you think you’ll live, and money you expect from other sources. 

There are also places where you can enter how much you currently have saved and how much you save per month so you can see whether you’re on track for your goal. Remember, if you have your money in a retirement account, it’s invested in assets that will hopefully increase in value over time. Your rate of return will dictate how much investment earnings you’ll have, and retirement calculators have a place where you can enter this. It’s best to use a 5% or 6% estimate. Though it’s possible your savings may grow more quickly than this, being conservative here will reduce your risk of retiring with too little.

In review

Your retirement calculator should tell you how much you must save per month to retire when you’d like to. If that’s not feasible, the easiest ways to correct that problem are to step up savings if you’re able to do so, or to delay retirement. The latter gives you more time to save and shortens the length (and the cost) of your retirement at the same time. Keep making adjustments until you have a plan that works for you.

Then, run your calculations again every year or two to make sure you’re on track. If your investments are performing better than you expected, you may be able to move up your retirement date. Or you may have to move it back if your investments haven’t grown as quickly as you had thought.

You might also change your mind about how you want to spend retirement, so you have to be flexible. By reviewing your plan yearly, you can get by with making small changes rather than trying to figure out how to come up with tens of thousands of dollars more on the eve of retirement.

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