A step-by-step guide to calculating your retirement savings

The concept of retirement has been redefined in recent years. Many Americans are extending their employment until later in life. Others are supplementing their income with self-employment or home-based gigs. Either way, you’ll need to come up with a number for how much you need to retire and live comfortably. You can use a retirement calculator to help you figure out what that amount may look like. Below are a few steps to get started.

1. Add up your expenses

Calculate how much you spend each month, multiply that number by twelve, then multiply the total by 25. The final number is a rough estimate of how much you’ll need to retire. For instance, if you spend $5,000 a month, that’s $60,000 a year, so you’ll need to save $1.5 million. That’s based on today’s numbers, but your expenses can change over time. So, it’s best to account for extra funds to cover health care costs, inflation, increases in monthly bills, travel expenses, and hobbies.

2. Figure out your timeline for retirement

There are two parts involved in figuring out your potential retirement timeline. The first is to estimate how many more years you want to work before retiring. The second is to divide those years into the number you calculated in Step 1. If you need $1.5 million and you have thirty years of work left, you need to save $50,000 a year. That number may seem daunting, but it includes investment returns.

3. Determine your risk tolerance

Risk tolerance is determined by personal lifestyle and the amount of time an individual has until retirement. A middle-aged person raising a family cannot afford to gamble their future on high-risk investments. Younger, single people may be able to take more chances. You can determine your risk tolerance by assessing your timeline, reviewing your financial goals, and being honest with yourself about how much uncertainty you’re willing to deal with.

4. Choose your investments carefully

Low-risk investments include products like bonds and mutual funds, where returns are lower but not volatile. Equities and alternative investments involve more risk because values tend to fluctuate, sometimes to extremes. 401(k) providers offer managed portfolios based on your risk tolerance. You can also self-manage investments, but make sure you know what you’re doing if you decide to go that route.

5. Ensure loved ones are cared for

It’s important to consider your family as you make retirement plans. Life insurance policy should be part of your investment portfolio. It ensures your loved ones will be cared for after you’re gone and help cover things like end-of-life expenses and medical bills, and even pay for your children’s tuition. Permanent life insurance is an asset that will accumulate cash value over time. You can speak to a licensed insurance agent to get a better understanding of what your needs are to ensure everyone is covered.

6. Review your plan regularly

This is where that retirement calculator will come in handy. Use it to review your plan and ensure that the numbers you come up with are adjusted properly to account for inflation. Your life circumstances may change also. Review your retirement plan immediately if you make significant life changes like getting married, buying a house, or having a child. This will help you keep the plan current so you can retire comfortably.

The Bottom Line

Add up your expenses, figure out your timeline to retirement, determine your risk tolerance, and invest carefully. Make sure your loved ones are taken care of by investing in a permanent life insurance policy. Use all these elements to develop a retirement savings plan and then review that plan regularly. Life and economic circumstances can change. Be prepared for that.

Sources:

https://www.synchronybank.com/blog/ultimate-guide-to-retirement-calculations/

https://www.thebalancemoney.com/how-to-calculate-your-retirement-needs-4061547

https://www.investopedia.com/articles/retirement/11/5-steps-to-retirement-plan.asp