will your retirement income be enough?

Will Your Retirement Income Be Enough?

Find out how to determine whether you're on the path to a comfortable retirement, or financial ruin.

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By Investopedia.com | 31.05.2010

How much money will you need to retire? Probably more than you think. Extended life spans, lower market returns and increased costs of living have forced us to have to save more. Unfortunately, most Americans are doing a poor job of securing their future. If you want to avoid having to flip burgers at age 75, one of the best things you can do for yourself is to calculate now how much you'll need in the future.

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The Need to Plan

Two generations ago, pensions and social security ensured a secure retirement for our grandparents. Today, pensions have become virtually extinct, shifting the burden of retirement savings away from the Government and onto the employees. Our retirement depends largely not only on our own ability to save and invest wisely, but also on our ability to plan.

How Much You Need in Total

Your first step in planning is determining how much you'll need.

Studies indicate that retirees will need to between 80% and 90% of their pre-retirement income to maintain their current standard of living. So, a reasonable target is one that will provide you with an annual income similar to the income you have now.

Then you need to consider a "safe" withdrawal rate. This is the percentage of your retirement nest egg you will withdraw each year during your retirement. Research indicates that, if they have saved enough, retirees can best preserve their assets if their annual withdrawal rate is 6% or less. This provides a quick and dirty formula for determining the total amount you need to save by retirement: divide your desired annual income by the withdrawal rate.

So, for example, if you want to target a retirement income of $60,000 per year, you need to save $1 million ($60,000 / 0.06). The following table offers some quick estimates of how much you might need to accumulate before you can retire.

How Much You Need to Save Each Month

Keep in mind that the above table is based on a rough formula. When calculating your target nest egg, and how much you have to save each month to reach that target, there are many factors that come into play:

    * Your current age.
    * Intended retirement age.
    * Life expectancy.
    * Current earnings.
    * Income sources during retirement.
    * Amount of current retirement savings.
    * Expected savings contributions.
    * Cash outflows during retirement.
    * Portfolio risk/return.
    * Inflation.

Incorporating some of these factors, the following table illustrates how much you'd need to save each month, if you started from zero at various years before retirement, to realize a $1 million savings. The table assumes that your annual investment rate of return on your savings is 8% (which cannot be guaranteed).

Clearly, planning for retirement is not something that you do shortly before you stop working. Because of the magic of compounding, the earlier you start, the less you'll have to save on a monthly basis - as illustrated in the table above. Lower rates of return or higher inflation, of course, will require a much higher contribution. To see more closely how the calculation works and how different variables affect it, see this calculator.

Planning for retirement is a lifelong process. Throughout your working years, your planning will undergo a series of stages in which you will evaluate your progress and targets and make decisions to ensure you reach them.

Resources for Saving for Your Future

In summary, planning for your retirement is an ongoing process. The earlier you start, the better off you'll be. The key is to save, save, save! The more time you have on your side, the better your outcome should be. This requires discipline, self study and time. So, take advantage of the many tools available to ensure your success.