How To Estimate What Your Retirement Finance Needs Will Be


Many people look at retirement financial planning as a challenging task. However, you can simplify the process a bit by figuring out what your financial needs will be in retirement. It's not possible to come up with a perfectly accurate number, but there are a few ways to devise a good estimate.

Try to Overshoot

Retirement financial planners are far more worried about their clients undershooting their marks. Your goal should be to have some cushion in case long-term personal or economic circumstances perform worse than expected. For example, you don't want to look at inflation at the rate it has been over your working life. Instead, you'll want to consider scenarios at least 20% above the worst year you've ever seen.

Similarly, you'll want to plan for a greater life expectancy than you might anticipate. People shouldn't assume, for example, that the early deaths of their parents mean there's no way they could live to 90 years old. You don't want to see your money run out.

Your Current Standard of Living

Most folks don't want to radically shift their standards of living in retirement if they can avoid it. Especially if you're young, retirement financial planning is a chance to achieve a high standard of living throughout your life.

Look at your current expenses. Try to roughly estimate what they would be in the future. Yes, those inflation estimates from the previous section matter here. Subtract expenses that are likely to disappear, such as childcare and the cost of commuting to work.

A common ballpark figure is to store 25 times your current spending. This should leave you room to extract 4% of your wealth, accumulate value through interest and growth, and maintain something close to the original principal adjusted for long-term inflation.

Leveraging Assets

It's normal for people who've done decades of retirement financial planning to have significant assets. Your house, for example, can be a store of wealth you can access by selling it or taking out a mortgage or line of credit against it. This can allow you to downsize, move, buy another home, or do anything else you might wish to do. Even if you don't expect to need the money, the store of value can be important down the road if some of your estimates prove to be a bit off.

Don't Stop

If some combination of hard work, good investments, and luck land you enough money to hit your retirement goals early, don't stop there. Particularly if you're not close to retirement age, you should take the opportunity to build a bigger and better retired life.

For more information, reach out to a retirement financial planner.


18 November 2021

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