How Much Money Will You Need for Retirement?

Most people understand that the sooner they begin planning for retirement the better. But the question is how much money will you need for retirement? This obviously is a very important question, but also one that is very difficult to answer.

National Insurance, your company sponsored pension plan, personal savings, longer life expectancy, inflation and your retirement needs (what you want out of retirement) are all factors that should be considered when determining how much you'll need to save for a comfortable retirement.

The components mentioned above are only some to items used in determining how much an individual needs to save for retirement. It is however very important to get a handle on your current expenses as it is the expense component that will help you determine how much money you'll need. The problem is many individuals don’t have any idea about what their expenses will be hence they underestimate what their savings should be. Also individuals don’t take into consideration medical costs and many don’t focus enough on the risk posed by inflation. One of the most neglected facets of retirement planning is longevity risk. With the modern advances in medical technology people are living longer than their life expectancy. Once you've gotten a good handle on your annual retirement expenses, you can then determine how you might pay for those expenses thus how much you will need to save for retirement.

It is estimated that an individual entering retirement will need approximately 70% of their pre-retirement income each year after they retire to enjoy the same lifestyle they had while they were employed. However, if you look at what an individual may want to do when they retire, for example, they may plan to increase their travel or they may want to take up an expensive hobby, whatever the situation is the replacement income factor which is estimated at 70% increases from 70% to 100%. To take this one step further, when you retire and if you still have a mortgage it is estimated that you will need 120%.

Getting a good estimate is invaluable as you plan your retirement and determine your savings need After you've determined what you think you'll need to live (expenses are) on during retirement, one rule of thumb is to multiply it by 25. For example, if you think you'll need $40,000 a year, you'll need 25 times that amount or $1,000,000 in order to retire comfortably. Then you need to consider what you are eligible for from National Insurance and or from company pension plan, identify their annual value and subtract that from your annual retirement expense. What's left is the amount of living expenses that must be made up either by investment income or other sources of income.

For example, if you receive approximately $12,000 from National Insurance benefits each year and $8,000 annual pension from your company sponsored pension plan, you will only need half of the $40,000 each year from your savings. Since you'll only plan on puling out about $20,000 each year, you'd need about $500,000 saved by your retirement date.

After determining your income gap, in this scenario $500,000 by your retirement date, you can easily calculate what you need to save to achieve your goal you'll need to save for retirement.

Another factor that will help you determine how much money you will need for retirement is to determine when you plan to actually retire. The younger you are when you retire, the longer you can expect to live during retirement. This means you need to have a lot more money saved. If you wait longer until retirement, not only will you be retired for a shorter amount of time, but you will also work more years, meaning you can save more. The younger you are and the more you have saved, the less you'll need to save in the future in order to achieve the same retirement standard of living as someone older or with less money saved up until that point.

The rule of thumb is not a rule of law but more importantly, everyone's retirement goals are personal and no one gets into trouble because they saved too much too soon. When it comes to how much savings you'll need for retirement, putting away more money while you’re working and working more years before retiring is a good form of insurance for ensuring a comfortable retirement.