You know how important it is to plan for your retirement, but where do you begin? One of your first steps should be to estimate how much income you\u2019ll need to fund your retirement. That\u2019s not as easy as it sounds, because retirement planning is not an exact science. Your specific needs depend on your goals and many other factors.<\/p>\n\n\n\n
It\u2019s common to discuss desired annual retirement<\/strong> income as a percentage of your current income. Depending on whom you\u2019re talking to, that percentage could be anywhere from 60% to 90%, or even more. The appeal of this approach lies in its simplicity, and the fact that there\u2019s a fairly common-sense analysis underlying it: Your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage to reflect the fact that there will be certain expenses you\u2019ll no longer be liable for (e.g., payroll taxes) will, theoretically, allow you to sustain your current lifestyle.<\/p>\n\n\n\n The problem with this approach is that it doesn\u2019t account for your specific situation. If you intend to travel extensively in retirement<\/a>, for example, you might easily need 100% (or more) of your current income to get by. It\u2019s fine to use a percentage of your current income as a benchmark, but it\u2019s worth going through all of your current expenses in detail, and really thinking about how those expenses will change over time as you transition into retirement.<\/p>\n\n\n\n Your annual income during retirement should be enough (or more than enough) to meet your retirement expenses. That\u2019s why estimating those expenses is a big piece of the retirement planning puzzle. But you may have a hard time identifying all of your expenses and projecting how much you\u2019ll be spending in each area, especially if retirement is still far off. To help you get started, here are some common retirement expenses:<\/p>\n\n\n\n Don\u2019t forget that the cost of living will go up over time. The average annual rate of inflation over the past 20 years has been approximately 2%.1<\/sup> And keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children\u2019s education early in retirement. Other expenses, such as health care and insurance, may increase as you age. To protect against these variables, build a comfortable cushion into your estimates (it\u2019s always best to be conservative). Finally, have an Azzad financial professional help you with your estimates to make sure they\u2019re as accurate and realistic as possible.<\/p>\n\n\n\n To determine your total retirement needs, you can\u2019t just estimate how much annual income you need. You also have to estimate how long you\u2019ll be retired. Why? The longer your retirement, the more years of income you\u2019ll need to fund it. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at 50 to get the most out of your retirement. Maybe a booming stock market or a generous early retirement package will make that possible. Although it\u2019s great to have the flexibility to choose when you\u2019ll retire, it\u2019s important to remember that retiring at 50 will end up costing you a lot more than retiring at 65.<\/p>\n\n\n\n The age at which you retire isn\u2019t the only factor that determines how long you\u2019ll be retired. The other important factor is your lifespan. We all hope to live to an old age, but a longer life means that you\u2019ll have even more years of retirement to fund. You may even run the risk of outliving your savings and other income sources. To guard against that risk, you\u2019ll need to estimate your life expectancy. You can use government statistics, life insurance tables, or a life expectancy calculator to get a reasonable estimate of how long you\u2019ll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There\u2019s no way to predict how long you\u2019ll actually live, but with life expectancies on the rise, it\u2019s probably best to assume you\u2019ll live longer than you expect.<\/p>\n\n\n\n Once you have an idea of your retirement income needs, your next step is to assess how prepared you are to meet those needs. In other words, what sources of retirement income will be available to you? Your employer may offer a traditional pension that will pay you monthly benefits. In addition, you can likely count on Social Security to provide a portion of your retirement income. To get an estimate of your Social Security benefits, visit the Social Security Administration website (www.ssa.gov<\/a>). Additional sources of retirement income may include a 401(k) or other retirement plan, IRAs, and other investments. The amount of income you receive from those sources will depend on the amount you invest, the rate of investment return, and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.<\/p>\n\n\n\n If you\u2019re lucky, your expected income sources will be more than enough to fund even a lengthy retirement. But what if it looks like you\u2019ll come up short? Don\u2019t panic \u2014 there are probably steps that you can take to bridge the gap. An Azzad financial professional<\/a> can help you figure out the best ways to do that, but here are a few suggestions:<\/p>\n\n\n\nProject your retirement expenses<\/strong><\/h2>\n\n\n\n
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Decide when you\u2019ll retire<\/strong><\/h2>\n\n\n\n
Estimate your life expectancy<\/strong><\/h2>\n\n\n\n
Identify your sources of retirement income<\/strong><\/h2>\n\n\n\n
Make up any income shortfall<\/strong><\/h2>\n\n\n\n
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