You know how important it is to plan for your retirement, but where do you begin? One of your first steps should be to estimate how much income you'll need to fund your retirement. That's not as easy as it sounds, because retirement planning is not an exact science. Your specific needs depend on your goals and many other factors. However, by doing a little homework, you'll be well on your way to a comfortable retirement.

Use your current income as a starting point

We suggest that you’ll need about 70 to 100 percent of your current annual income to fund your retirement. This can be a good starting point, but will that figure work for you? It depends on how close you are to retiring. If you're young and retirement is still many years away, that figure probably won't be a reliable estimate of your income needs. That's because a lot may change between now and the time you retire. As you near retirement, the gap between your present needs and your future needs may narrow. But remember, use your current income only as a general guideline, even if retirement is right around the corner. To accurately estimate your retirement income needs, you'll have to take some additional steps.

Project your retirement expenses

Your annual income during retirement should be enough (or more than enough) to meet your retirement expenses. That's why estimating those expenses is a big piece of the retirement planning puzzle. But you may have a hard time identifying all of your expenses and projecting how much you'll be spending in each area, especially if retirement is still far off. We recommend that you work with one of our Stage 2 Advisors to help you understand what retirement cost you are likely to have.

Decide when you'll retire

To determine your total retirement needs, you can't just estimate how much annual income you need. You also have to estimate how long you'll be retired. Why? The longer your retirement, the more years of income you'll need to fund it. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at 50 to get the most out of your retirement. Maybe a booming stock market or a generous early retirement package will make that possible. Although it's great to have the flexibility to choose when you'll retire, it's important to remember that retiring at 50 will end up costing you a lot more than retiring at 65.

It’s also important to understand what your life expectancy might be. The longer you live, the more capital and income you will need to fund your retirement.

Identify your sources of retirement income

Once you have an idea of your retirement income needs, your next step is to assess how prepared you are to meet those needs. In other words, what sources of retirement income will be available to you? Your employer may offer a traditional pension that will pay you monthly benefits.

In addition, you can likely count on Social Security to provide a portion of your retirement income. To get an estimate of your Social Security benefits, visit the Social Security Administration website (www.ssa.gov) and order a copy of your statement. Additional sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities, and other investments. The amount of income you receive from those sources will depend on the amount you invest, the rate of investment return, and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.

Make up any income shortfall

If you're lucky, your expected income sources will be more than enough to fund even a lengthy retirement. But what if it looks like you'll come up short? Don't panic--there are probably steps that you can take to bridge the gap. We would be glad to help you figure out the best ways to do that, but here are a few suggestions:

Retirement planning is a journey. Those who plan well and make room for changes and contingencies are often better prepared than those who don’t. We suggest that you consider having a formal retirement and distribution plan. We would be glad to help in the journey.

With warm regards,

Stage 2 Planning Partners

Josh Patrick © 2007

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