A question I often asked my clients, do you know how much you need to retire? And, most don’t know. Most people don’t start thinking about retirement until it gets close to retirement. And, by then it may be too late! In reality, retirement planning should start in your twenties!
When preparing for retirement, it’s important to live within your means. If your expenses and debt exceed your earnings, then you should try to get them under control as soon as possible. The lower the ratio of expenses to income, the better.
When asked, what is the formula for calculating how much is needed for retirement? Some base the formula on a percent of income and others on current living expenses. It’s assumed when you retire, your income will be lower than your employment years. So it’s important to know, when you plan on retiring, how much you need to retire, and how long do you think you will live?
There are general formulas for calculating how much is needed. But, they’re not exact. They do, however, provide a general idea. The average amount needed for retirement is $1,300,000 to $1,500,000 or more which averages out to $65,000 to $100,000 per year for fifteen to twenty years. If you retire between ages 65 and 70, you’ll probably live to 85 or older. So you need to ask yourself, how much can I save over my employment years?
Other questions to ask yourself:
- Do you plan on working during retirement?
- “What if” you have to work during retirement?
- Will you be owning or renting during retirement?
- How much debt will you carry into retirement?
- How’s your health?
- Will you be taking care of anyone during retirement?
- Are you currently saving for retirement?
- How much of your payroll deductions is for retirement?
- Is your employer contributing to your retirement?
- What are your sources of savings?
- What are your current living expenses?
- What expenses will carry over into retirement?
- How much of your retirement funds will be used before retirement, for home purchase, repairs, medical expenses, debt, starting a business, etc.?
Then, there’s tax planning for retirement.
- How much of your retirement income will be taxable?
- How much will be non-taxable?
- How much taxes can I pay now on retirement contributions?
- How much non-taxable income can I defer to retirement?
There’s a lot to consider when planning for retirement. And, it doesn't have to be confusing. It requires a common sense approach to managing your assets, liabilities, and taxes. If you take the time to plan, the more likely you're going to be prepared. For more information on retirement planning contact us.
Accounting and CPA Exam Tutoring Service LLC is available to answer your questions.