Everyone has their own idea of what retirement looks like. Maybe it includes travel. Or buying a vacation home. Or spending more time with grandkids. Making plans for the life you want should also include a plan for your retirement savings so it can go the distance.
With retirement on the horizon, now is a good time to calculate how much income you’ll need. Consider these questions to calculate how much income you may need in retirement.
What are your monthly expenses?
This includes two categories: needs (the essentials) and wants (the fun stuff). Your needs are things you can’t live without or are obligated to pay, like utilities, groceries, and a mortgage. Wants are things that are nice to have, like travel, dinners out, and personal splurges.
What you consider a need versus a want depends a lot on the lifestyle you live now. Do you want to continue this lifestyle in retirement, or do you plan to make changes? Be idealistic—and realistic—about your vision for the future.
How much will it cost?
Estimate your monthly retirement costs based on what expenses you pay for now—but assume that it will change once you retire. For example, your health care costs may go up. Or your housing costs may go down if you pay off your mortgage.
There’s also inflation to consider. Groceries, gas, and most things you buy will cost more in 20 years than they do now.
When do you plan to retire?
And the bigger question: When do you plan to start taking withdrawals from your retirement accounts, like your 401(k)s and IRAs? The longer you wait, the more potential you’ll have to grow your money tax-deferred (although you typically need to start taking minimum distributions at 72).
If retirement is near and you plan to make withdrawals soon, there are investment strategies that may help you cover the basics by providing regular, guaranteed income.
Have you factored in the needs of your spouse?
Does your spouse have their own retirement savings, or will you be responsible for the needs of your household? Remember that how you live now may change in the future. Ensuring you have enough money to cover expected and unexpected expenses for the both of you is essential.
What are your sources of retirement income?
When your paycheck stops, you’ll need to create your own. This will likely come from changeable income—things like 401(k)s, IRAs, and other investments—which can fluctuate based on the market or other factors.
Guaranteed income—things like Social Security or a pension—is money you know you’ll have for as long as you need it. Will you have enough guaranteed income? Or will you need to consider new investment strategies for generating lifetime income, like annuities?
What's next?
Checking in on your retirement savings regularly can help you with decisions related to your money conversations. Log in to principal.com to see how much you’re saving. Don’t have an employer- sponsored retirement account or want to save even more in addition to a 401(k)? We can help you set up your own IRA or Roth IRA. Ready to continue building your financial foundation? Our learning library has information on everything from building a budget to buying a home.
