How on Earth can you fathom how much income you will need when you retire? A good first step when retirement planning [1] 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 [2] 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 [3] 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
- Health
- Heating
- 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 [4] that can help you visualise a life of permanent leisure luxury.
Meanwhile, this retirement calculator [5] 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.
Working out how much you will need when you retire is just one part of creating your retirement plan [1], so do subscribe [6] to Monevator for more pointers.