You know how important it is to plan for your retirement, but where do you begin? One of the first steps should be to estimate how much will you be able to spend in retirement to ensure you meet your financial needs during this stage of life.

While that may sound straightforward, retirement planning is not an exact science. Your needs depend on a variety of factors, including your retirement goals, lifestyle expectations, and health considerations.

Use Your Current Income as a Starting Point

 

A common approach to estimating retirement income is to consider a percentage of your current income. Experts often suggest that you’ll need anywhere from 60% to 90% of your pre-retirement income to maintain your lifestyle in retirement. The idea is simple: since your current income supports your existing lifestyle, a reduced percentage may allow for adjustments like fewer work-related expenses and lower tax obligations.

However, this method may not account for personal factors. For instance, if you plan to travel extensively during retirement, you may need 100% (or more) of your current income. So, while using a percentage as a benchmark can be helpful, you should also review your current expenses in detail and think critically about how they will change when you retire.

Project Your Retirement Expenses

 

Your retirement income needs to cover all your expenses. Estimating those expenses can be challenging, especially if retirement is many years away. To help, here are some common retirement expenses to consider:

• Basic living costs: Food, clothing, housing (rent or mortgage, property taxes, insurance, upkeep), and utilities
• Transportation: Car payments, insurance, gas, public transportation, maintenance
• Insurance: Medical, dental, long-term care, life insurance
• Health-care costs: Co-pays, deductibles, prescription drugs not covered by insurance
• Taxes: Federal and state income tax, capital gains tax
• Debt payments: Loans, credit card payments
• Family expenses: Supporting adult children, educational costs for grandchildren
• Recreation: Travel, dining, hobbies, and other leisure activities
• Unexpected expenses: Emergency repairs, care for aging parents, etc.

Keep in mind that inflation will impact your retirement spending power. Historically, inflation has averaged about 2% annually, according to the U.S. Bureau of Labor Statistics. It’s important to build this into your projections, particularly since certain costs, like health care, may increase as you age.

Decide When You’ll Retire

To understand how much you’ll be able to spend in retirement, you also need to determine when you plan to retire. The age at which you retire directly affects how many years you’ll need to fund, so it’s an essential part of your planning process.

For example, retiring at 50 could mean supporting yourself for 35 years or more, especially as life expectancies increase. Retiring later, closer to 65 or beyond, reduces the number of years to finance and could allow you to accumulate more savings.

Estimate Your Life Expectancy

 

You’ll also want to estimate your life expectancy to plan for the possibility of a long retirement. Using resources such as life expectancy calculators, insurance tables, or government statistics can help you make informed estimates. While you can’t predict the future, planning for a longer retirement can help safeguard against the risk of outliving your savings.

Identify Your Sources of Retirement Income

 

Once you have an estimate of your retirement expenses, it’s time to assess how prepared you are. Consider all possible sources of retirement income, such as:

• Employer pensions
• Social Security benefits
• 401(k) plans, IRAs, or other investment accounts
• Income from part-time work during retirement

For a clearer picture, you can visit the Social Security Administration website to review your potential benefits. Similarly, understanding how much income your retirement investments may provide will help you determine if adjustments are needed.

Make Up Any Income Shortfall

 

If it looks like your retirement income will fall short of your needs, don’t panic. There are ways to bridge the gap. Here are some strategies to consider:

• Cut back on current expenses to save more for retirement.
• Shift investments to options that outpace inflation (keeping in mind that higher returns often come with higher risks).
• Adjust your retirement expectations to reduce overall costs.
• Consider working part-time during retirement.
• Delay retirement to allow more time for savings and investment growth.

The Takeaway

 

Retirement planning can feel daunting, but taking proactive steps now can make a significant difference in how comfortable your retirement years will be. Whether you’re far from retirement or closer to the finish line, the key is to start now, review your plans regularly, and adjust as needed. Navigating your retirement planning can be complex, but you don’t have to do it alone. At Navalign Wealth Partners, we specialize in creating personalized strategies that align with your unique goals and secure your financial future. If you’re ready to take control of your retirement, or if you have any questions or concerns, reach out today—your future self will thank you.