How on Earth can you fathom how much income you will need when you retire? A good first step when retirement planning is to know how much you need to live on now.
For a realistic answer, you can use a budget-planning tool like Money Saving Expert’s Budget Brain to capture your current spending.
I like this tool because it’s like holding your finances up to the Snow Queen’s mirror. It will give you the true picture of your outgoings – warts and all – by speaking plainly about areas that might otherwise be overlooked, such as dental expenses or beauty therapies. (I spend a lot on virgin’s blood, myself).
Will I really need so much income when I retire?
It’s commonly held that we spend less in retirement than in the buccaneering days of youth, so you can probably strip out:
- Mortgage payments (assuming you have paid it off by retirement age)
- Work related expenses
- Child related expenses
But retirement isn’t all about sitting atop a hoard of your treasure, saving pennies with coupons / cruising the Caribbean, and writing letters to Radio 4.
For instance, you might consider upping your allowance for:
- Travel costs
- Werther’s Originals
Once you’ve done all that, you should have a reasonable base figure for the annual income you’ll need to hit on the retirement calculator.
A few wrinkles
If you’re having trouble picturing your retirement, try this gimmicky but fun retirement income calculator that can help you visualise a life of permanent leisure luxury.
Meanwhile, this retirement calculator lets you pick your desired monthly income, then crank the handle to see how fortune plays out.
Remember that the higher your target income:
- The longer you will need to save,
- Or the more you will need to save,
- Or the higher your growth rate will need to be (which implies a riskier asset allocation),
- Or some combination of all the above.