How to Calculate Your Retirement Income

Photo Images: MoMo Productions/Getty Images

To adequately prepare for retirement, you have to know how much income you’ll need during this phase of your life. You’ll need to determine your estimated annual income needs so that you can work towards your total savings goal while you’re still employed. Follow these tips to calculate retirement income.

Envision Your Retirement Plans

The Motley Fool notes that you should plan on needing about 80 percent of your former annual income during retirement. The reasoning behind this recommendation is the notion that most seniors spend less in retirement, reports The Motley Fool. Though this figure is a decent place to start, your situation will influence your true savings needs.

Take a few minutes to envision your ideal retirement. Do you have dreams of traveling or taking up new hobbies? Or, do you see yourself spending more time with local friends and volunteering at charitable organizations? You can then configure your income goal to match your preferred lifestyle.

Create a List of Your Retirement Expenses

Now that you know how you want to spend your retirement, it’s time to produce a list that forecasts your expenses. This list can incorporate fixed and variable expenses.

Fixed expenses tend to stay the same, like your mortgage payment, car payment and utilities, while variable expenses fluctuate each month. Variable expenses include items like your groceries, entertainment expenses and transportation costs.

Make sure to include items that you don’t pay regularly, like car maintenance, home maintenance, travel expenditures, gifts and charitable donations. Also include your healthcare costs; this is one area where many individuals may spend more once they retire.

Once you have all your expenses listed for a month, add them up and multiply them by 12. Your annual retirement income needs to meet or exceed this figure. It’s possible that your expenses may fluctuate throughout your retirement. For example, you might spend more while traveling more during your early retirement. If certain years might call for significantly more income, you can account for this when you do your calculations.

Determine How Much Total Income You Need for Retirement

Now that you have an estimate of your annual expenses, you can calculate your retirement savings goal. A simple way to do so is to take your income needs and multiply the number by 25, as suggested by The Balance. For example, if you think you’ll need $60,000 per year in retirement, $60,000 multiplied by 25 yields a savings goal of $1.5 million.

To get a more exact figure for your retirement nest egg, you can use a retirement savings calculator. A retirement savings calculator can take into account items like inflation and your estimated savings returns.

Consider Your Tax Situation in Retirement

Whether you have to pay taxes on your retirement income depends on the type of accounts you have. You don’t have to pay taxes on savings in a Roth 401(k) and Roth IRA since you already paid income taxes on those savings contributions. Accounts funded with tax-deferred dollars, like traditional IRAs and 401(k)s, do require you to pay taxes on the withdrawals. Make sure that you take into account your potential tax liability when determining your total income needs.

Make Sure You’re Saving Enough to Meet Your Income Needs

Once you know how much income you’ll need in retirement, it’s time to make sure that you’re saving enough to meet your needs. A retirement calculator can help you determine if your savings rate falls short based on the amount of time you have until retirement and your estimated annual return on your savings.