Only 1 in 4 Americans Has Made This Essential Retirement Planning Move

Noble Horvath

When you’re planning a trip, you usually figure out where you want to go, how long you’ll stay, what you’ll do there, and how much all of that will cost. You don’t throw a handful of clothes in a suitcase, hop in your car, and say “I’ll wing it.” Yet […]

When you’re planning a trip, you usually figure out where you want to go, how long you’ll stay, what you’ll do there, and how much all of that will cost. You don’t throw a handful of clothes in a suitcase, hop in your car, and say “I’ll wing it.” Yet when it comes to retirement planning, the latter approach is surprisingly common.

More than three-quarters of workers planning to retire haven’t even calculated how much money they’ll need for retirement, according to Edward Jones. Many don’t know how to figure this out, or they have concerns about their future, including how much they can count on from Social Security benefits. This can definitely make things confusing, but it’s not an excuse to skip retirement planning altogether and hang your hopes on good luck. Here’s a basic primer on how to figure out how much retirement will cost you.

Happy man typing on laptop

Image source: Getty Images.

Step 1: Estimate how long your retirement will last

This step consists of two parts. First, you have to decide when you’d like to retire. If you’re not sure when you’ll be able to afford to do so, just choose any age that sounds right for now. You can always alter this later if you realize your first estimate is not feasible.

Then, you have to estimate your life expectancy. This is always going to be a guess because no one knows this for sure, but it should be an educated one based on your health and family history and what we know of average life expectancies. You can use this life expectancy calculator to get a baseline, but it’s always best to err on the side of a longer life, just in case. Consider adding five to 10 years to the age your life expectancy calculator shows, unless your health history gives you reason to believe you won’t live that long. Once you’ve settled on a life expectancy, subtract your chosen retirement age to estimate the length of your retirement.

Step 2: Estimate your retirement expenses

Calculating your estimated annual expenses in retirement is similar to creating a budget for today, except it requires a bit more guesswork. You can use your current budget as a jumping-off point and adjust your spending in each key category — housing, food, transportation, etc. — up or down depending on how you expect this to change between now and your retirement.

Some of your current expenses will decrease or disappear. You likely won’t have to provide for your children in retirement, and you won’t have to set aside any more money for retirement once you’re there. But other expenses, like healthcare, will probably rise as you age, so you’ll need to budget more for these than you’re used to. Again, it doesn’t hurt to figure a little high if you’re worried about running out of money.

Once you have your basic retirement expenses covered, you should plan for any significant one-time expenses you foresee, like travel costs or a big-ticket purchase. Add a little extra in case inflation makes these items more expensive than you originally anticipated.

Step 3: Estimate your retirement income

You should already know how much money you currently have in your retirement account, or at least you should know how to find that out. Note the balances of all of your retirement accounts, if you have several, and keep this information at hand.

If you’ve worked for at least 10 years or you’re married to someone who did, you’ll also qualify for some Social Security benefits when you retire. How much you’ll get depends on your income during your working years and the age you begin benefits. You can start claiming as early as 62, but you’ll get more money per check if you delay benefits. This stops at 70 when you reach your maximum benefit. Here’s a guide explaining all of this. You can calculate your Social Security benefit at different ages by creating a my Social Security account. 

Once you’ve decided when you’d like to begin claiming, you can use this information to calculate your approximate lifetime benefit by multiplying your monthly benefit by the number of months you expect to receive benefits. For example, if you expect $1,500 per month once you begin claiming at 67 and you think you’ll live for 20 years after that, you’ll get $360,000 total ($1,500 per month x 12 months x 20 years). 

If you receive a pension or a 401(k) match through your job, you should also figure out how much money this could amount to over time. Ask your employer about how these programs work and note this down so you can reference it later. These other sources of income are important because they reduce how much you need to save on your own.

Step 4: Put it all together

Once you have all of the important figures, you’re ready to put them all together. The simplest way to do this is by plugging all of this information into a retirement calculator. That will do all the hard math for you, including estimating how much your current savings will grow to between now and your retirement. 

Most retirement savings calculations use a 3% annual inflation rate. It may be higher or lower than this in a given year, but this should even out over time. When it comes to your investment rate of return, use 5% or 6% per year. Your investments will (hopefully) do much better than this, but you can’t be sure, so stay conservative here. 

Once you’ve entered all your information, your calculator should tell you the total cost of your retirement and how much you should save monthly to reach your goal. Now is the time to make adjustments if you realize that’s not feasible. Try out different retirement ages or different monthly savings amounts until you find a plan that fits your budget.

Then, commit to it and begin saving. A workplace retirement plan is a great place to start, especially if your company matches some of your contributions. Or you can save money on your own in an IRA.

Step 5: Keep updating it as needed

The above steps explain the basics of creating a retirement plan, but it’s not something you do once and never look at again. Chances are, your goals for retirement will change a little as you age. You might be able to save more in some years than others. Your investments will perform differently at different times. All of this requires you to update your retirement plan periodically to account for these changes.

Check in with yourself at least annually, and whenever you experience a major change to your finances, like a new job, a household death, or welcoming a new family member. It will take a little more effort on your part, but it will enable you to enter retirement feeling like it’s a well-planned vacation rather than something you’re making up as you go along.

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