Figuring Out How Much You Really Need to Retire
One of the big questions that many
people have with regard to their future finances is how much they need to retire. As with so many items related to personal finance, there is no
"one size fits all" answer. It depends largely on your individual
preferences and needs. To figure out how much you need to retire, you need to think about your current expenses, and what sort of income you will need to
maintain a lifestyle you enjoy. With the help of a retirement calculator, you
can then create a plan for setting aside enough money to build the nest egg you
require.
Considering Your Expenses
The first step is to look at yourcurrent expenses. Look at where you spend your money. Then decide whether or
not you will still have those expenses in retirement. If you are track to pay
off your debt before you retire, you will discover that your expenses are
likely to be less -- unless you have certain goals, such as travel. Another consideration
is whether or not you plan to downsize. Many retirees downsize to smaller, less
expensive homes. This can be a good way to minimize your expenses.
However, if you want to be safe,
rather than sorry, it is a good idea to just assume that you will have the same
expenses in retirement as you do now. If you are practicing sound financial
habits, your expenses shouldn't be more than 70% to 80% of your current income.
Once you decide on your expenses, break them down into monthly expenses.
Indeed, it might be easier to look at your current monthly expenses, and then
assume that's what you will need in retirement.
One of the advantages to figuring your
needs this way is that you can replace some of your current obligations with
something else. For instance, if you are currently spending $500 a month to pay
off debt, you can still include that $500 in your needed income for after you
retire. Since you won't be paying off debt during retirement, you will have
planned for an extra $500 a month that can be used for something else, such as
travel. The same principle can be applied to downsizing. If you base your
future retirement needs on your current expenses, you will be more likely to
have enough money.
Nest Egg or Passive Income
Some people, after figuring out theirmonthly income needs in retirement, become disappointed when the retirement
calculator returns its verdict. How will you build up a nest egg of $1 million
or $800,000 or whatever you need to generate the income you require? The good
news about figuring your income needs based on your monthly income is that you
can also plan to begin building up passive income now. Build up alternative
revenue streams that will keep paying you in the future, and a huge nest egg
suddenly doesn't seem so important.
Start a business, monetize a web site,
produce a creative work or start an income portfolio. All of these things can
help you create income streams that will last you. You can still build up your
nest egg as well, but the task won't seem as daunting if some of your
retirement income is from passive income.
