Saving for & Estimating Retirement Costs

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

After reading this lesson, you will get a better idea of how you can calculate your retirement needs. Learn what calculations you need to determine your financial needs along with way to decrease your needs.

Saving for Retirement

As you get older, you will no doubt start thinking about retirement. Retirement is when you stop working. For most people, it means relying on government assistance programs such as Social Security and their own savings to pay for necessities such as rent or mortgage, food, and clothing.

To make sure that you have sufficient funds to take you through your whole retirement, you will need to make careful financial plans. IN this lesson, we'll look at how to do just that.

Start Early

The earlier you start your retirement plans, the easier it will be to save up enough funds to take care of you through your whole retirement. Why is this? Let's look at an example.

Say you start saving for retirement when you are 18, and you put $100 each month towards your retirement. By the time you are 62, you will have saved:

$100 * 12 * 44 = $52,800

The 44 is the number of years till you reach age 62. Now, how much do you think you would save if you start saving when you are 35? Let's see. If you are 35, you have 27 years till you reach age 62. Saving the same $100 each month, you will save:

$100 * 12 * 27 = $32,400

That's a whole lot less. In order to save the same $52,800 in 27 years, you would have to save $52,800 / 27 = $1,955.56 each month. Looking at the $100 number and comparing it to the $1,955.56 number, you can see that it is much easier to save $100 each month than it is to save $1,955.56 each month. So, the earlier you start, the easier it will be to save up enough funds.

Choose an Investment

The example that you just saw doesn't even cover possible interest rates that you can earn. Even if you put all your money into a low interest bearing savings account, you will still make a substantial extra amount. If you have already saved up $20,000, an interest rate of 0.04% will give you over $800 each year! And as you keep saving and growing your account, so will your interest earnings. All this earned interest adds up!

Besides a straight savings account, you can also open up what is called an Individual Retirement Account (IRA). This is a special retirement account with tax benefits since the federal government allows you to contribute a certain amount of money tax free each year. Also, this type of retirement account can earn you a higher interest rate if you invest in mutual funds that grow over the years. Of course, whenever you are dealing with the stock market, there is the possibility that you will lose all your money. This is something you will need to consider before you begin investing in the stock market by means of a mutual fund or stocks.

Estimating Needs

Now, the most important part of your retirement planning is that of estimating your retirement needs. The example you read earlier gave you a total savings of $52,800 if you saved $100 each month starting when you are 18. If you think you will live for another 30 years, you will take this $52,800 and divide it by 30. You get:

$52,800 / 30 = $1,760

This is how much you can spend each year from your savings. Dividing this by 12 gives you $1,760 / 12 = $146.67 of available funds per month. Now, looking at this number and comparing it how much you spend each month, you can see that $146.67 is definitely not enough to live off of. So, you can't just start saving and think you'll have enough. You need a plan that will help you reach your financial goal for retirement.

To calculate your retirement needs, you need to look at your necessary monthly expenses along with your other living expenses. To help you plan it out, you can write your expenses in a table. For example, your monthly expenses might be the following:

Expense Amount
Mortgage $600
Utilities $200
Property tax $200
HOA $120
Food $400
Cable TV $100
Wireless phone $50
Landline $30
Entertainment $150
Clothing $50
Health care $600
Extra just in case $300

Add all these numbers up, and you have your necessary monthly funds. You get $2,800. So you need $2,800 to live each month in retirement. So, if you retire when you are 62, and you estimate that you will live for another 30 years, then your total necessary living expenses for those 30 years are:

$2,800 * 12 * 30 = $1,008,000

This is just for you. If you have other family members, your necessary funds will of course be higher to care for those people as well.

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