"Bartender, a refreshing beverage and a dry cocktail napkin for a few calculations, please."
Ever wonder whether you'll have enough to retire? Sure, you could sit down to a long, drawn-out process in which you look at our expenses and try to anticipate what they would be in retirement. But why bother? After all, retirement is a long way off, and you have no real idea of what those expenses will be then. You do, though, know that you live comfortably today (we hope) and that it's unlikely you'll be saving money or paying FICA (unless you choose to work) after you retire. Therefore, excluding those items from your gross income, you can come up with a number that's fairly close to what it would take to sustain your current lifestyle.
Simply put: Fools want a retirement income that equals our gross income today less all savings and all FICA taxes.
But you still have to decide what income you will need in retirement to live the way you want. Some folks can get by on much less than they use now, while others may decide they want more. It's a personal choice for all of us. So, Fool, pick a number.
"Bartender! Another cocktail here! And don't scrimp on the napkins!"
To do things right, we must take a cold, hard, objective look at our desired income, subject it to a rational choice of assumptions, and make some detailed calculations. The best way to do the calculations is with one of the readily available software packages available commercially, such as Quicken Financial Planner or one of our Foolish Retirement calculators. Before you use any of these tools, you need some preliminary information. At a minimum, you want to:
1. Decide on the annual income you desire in today's dollars.
2. Pick a retirement date.
3. Determine your lifetime average inflation rate (between 3% and 4% is a good start).
4. Determine the average rate of return you expect on your investments before and after retirement.
5. Determine the current market value of all your investments, including regular accounts, IRAs, and company tax-deferred savings plans like 401(k) plans.
6. Obtain an estimate of any company-provided pension benefit.
7. Obtain an estimate of future Social Security benefits (which can be done at www.ssa.gov).
Armed with this data, you can determine the annual savings required for you to enjoy the good life. You will also be able to play "what if" games and see the results quickly should you decide to change variables such as inflation, rates of return, date of retirement, and desired income.
The earlier you start, the easier it will be for you to amass the dollars you will need on the day you retire. If you put $1,000 per year for 25 years into an investment earning 10% annually, you would have $108,182. Wait just five years before starting that process, and on the same date in the future you would end up with $63,002. That $5,000 you "saved" by waiting just cost you $45,180 in tropical drinks.
If you're looking for a second opinion -- and a professional opinion -- on your retirement plan, check out TMF MoneyAdvisor, which features access to financial advisors and a sophisticated planning tool.
