The amount of money needed for retirement is a concern for the vast majority of people. It is not easy to estimate how much money we will need to retire, but there are some tips and ideas that can be followed to try to guess it.
The main problem (from the financial point of view) of retirement is the reduction in purchasing power when we leave our professional life. As our income is reduced, we do not have the same financial resources as when we are still working.
The main way to compensate for the loss of purchasing power is to have a supplementary amount of money to make up for the lack of earnings. However, estimating this amount of money is not always easy.
First steps to figure out your retirement money
The first step in calculating the actual money you need for retirement is to know how much money you will have from the day after you retire.
Needless to say that you should carefully review all the sources of money you will can count on in retirement. These include savings plans, passive income, rents, investments, and other potential sources of income, such as side jobs.
Although it may be difficult because of the time lag between you and your retirement, this is a necessary exercise as this is the basis for the second step: calculating your expenses in retirement.
How much money will you spend when you retire?
This is not a very easy step either, but it is necessary. It is a matter of projecting future expenses. The projection has to be as realistic as possible.
In this scenario, you should consider how your finances will change as time goes by. For example, you will probably have paid off your house at that point, but at the same time, new expenses will arise due to more free time, increased health care needs, and so on.
This is not a very easy formula, but you do not need to make an exact calculation either. The aim is to establish several maximums and minimums on which to make the final calculation.
How much extra money do you need to retire?
If you have done the two steps above, you should simply reduce your income forecast by your expense forecast. This will give you a positive or negative result.
If this balance is calculated every month, you should carry it over to a full year and then to between 20 and 25 years, which is the average life expectancy after ordinary retirement. Logically, if you take early retirement, the average life expectancy period is higher.
Although it is not a precise calculation, it will give you a good perspective of the direction your future savings will take and what your additional retirement needs will be.
Some calculators allow you to be much more specific about this data. However, these calculators also require you to be much more specific about aspects such as future income and expenses, which are difficult to work out and are not always very easy to understand.