Although it is nearly impossible to predict all the variables that might affect your retirement income over a 30-year time window, there is a simple calculation you can make to get a picture of how your savings will behave through time, giving you an idea of how much you’ll have by the time you retire.
If you've asked yourself ‘do I have enough to retire?’ this article will help: we present you with a way of finding out. All you need to do are some calculations based on your ideal retirement age and how much you want to spend while in retirement.
There is a simple 5-step calculation that will help you determine if you’ll have enough income and savings by the time you reach retirement.
To get started, you need to follow these 5 steps:
1- Determine your total annual contributions to the retirement savings plan
2- Multiply that number by the number of years left until you retire
3- Add your current retirement savings to that number
4- Divide by the number of years you expect to live in retirement
5- Add that to any guaranteed source of income
These 5 steps will help you determine how well your savings are doing towards a relaxed retirement. Let’s see how it works. For this example, we’ll use a sample couple, both partners aged 55.
-Every year, each contributes the maximum amount to an IRA fund. That’s $16,000 ($8,000 each)
-They have already saved $140,000
-They would like to retire at the full retirement age of 67, as defined by Social Security
-Based on life expectancy calculations, they expect at least one of them to live to the age of 94, so that’s 27 years in retirement
-He will have $2,200 each month in Social Security benefits ($26.400 per year), and she will collect half of that amount ($13,200) as a spousal benefit
So now that we have all the data, let’s see how the calculation goes:
1- $16,000 is the total annual contribution to their retirement savings plan
2- $16,000 x 12 (years left until retirement) = $192,000
3- They had already saved $140,000, so if we add that to this result: $140,000 + $192,000 = $332,000
4- $332,000 / 27 (number of years expected to live in retirement) = $12,297
5- Add that to any other guaranteed source of income: $12,297 + 26,400 + $13,200 (from Social Security) = $51,897
So, in this example, $51,897 represents the expected annual income for this couple. The last step to see if your retirement savings are doing well is to calculate a budget and see if it will be enough.
Although many fluctuations and variations are impossible to predict (and that can really affect your savings), this is a simple yet effective way of calculating if you are on your way to a relaxed retirement.
Also, if you take the time to calculate this and you notice that you are not saving enough, it is a great way to correct that. The sooner you know, the better!