Even if you love your job, retirement looms on the horizon. You may dream of the day when you can toss out the alarm clock and spend your days doing something you love. But Social Security only provides, on average, 33 percent of retiree income, which means the majority of your income will need to come from another source.

Before you retire, you should sit down and plan your retirement finances. This includes making up a retirement budget and checking any retirement accounts you have to make sure they’re well funded. These estimations will help you head toward retirement with confidence.

Will Your Retirement Income Be Enough?

Determining whether your retirement income will be enough is tricky. There are so many variables. Is your home paid off? Do you hope to travel? How much income will you have rolling in?

All of these factors contribute to whether you’ll have enough to retire “comfortably.” Things get a little more complicated when you ask questions like, “How much do I need to retire at 62?” Retiring early not only adds to the years that you’ll be relying on that income, but it also reduces how much you’ll get from the Social Security Administration. It may also cut the amount of money you’ll get from any retirement savings accounts you have. Whatever your plans, it’s important to look at both columns--how much you’ll bring in and how much will be going out. This means reviewing your current expenses and deciding what you’ll spend after you leave the workforce.

Estimate Your Retirement Expenses

Determining how much money you need to retire comfortably starts with estimating your expenses. If you already keep a monthly budget, this probably won’t be too tough. You can take your current expenses, line by line, and look for areas where you could cut back. If you’re starting from scratch, this list will help you determine how much is enough to retire and live comfortably.

• Housing--Even if you’ll live in a home without a mortgage, you’ll still have to pay property taxes and homeowner’s insurance. There are also utilities and general upkeep unless you’re renting and your landlord takes care of those things.
• Household expenses--That regular trip to the grocery store won’t stop once you’re retired. You may be able to cut back, but you’ll always have to buy food, beauty products, cleaning supplies, and all the other basics needed for daily living.
• Medical expenses--Medical costs tend to increase with age, so it’s important to check into how much you’ll pay in healthcare insurance premiums. Price various Medicare plans and factor in what you’ll have to spend on copays and deductibles.
• Transportation--If you plan to own at least one vehicle, you’ll have auto insurance costs in addition to paying for repairs and upkeep. Otherwise, set a budget for public transportation or rideshare services.
• Fun--Once you have more leisure time, will you want to travel? Plan in funds for vacations, as well as the occasional restaurant meal or movie.

Keeping Your Standard of Living

One cold, hard fact when figuring “do I have enough to retire” is that costs will go up. If you’re close to retirement age, this might not be as much of a consideration, but if retirement is pretty far down the road for you, you’ll need to pay attention to this.

Say you plan to retire with 2 million dollars in the bank. That sounds like plenty of money, right? Even today, that might not keep you at your current standard of living, but 10 or 20 years from now, it will be even tighter. Yes, you’ll have Social Security income to supplement that, but if you retire at 65 and live to the current life expectancy of 78, that’s $153,846 a year. If that amount has to be divided in half for a spouse, you’ll have $76,923. Sounds good? What if you live to 88 or 98 or beyond? Then factor in an increase in the cost of living and you may find you aren’t as comfortable as you hoped to be.

How Much Do I Need to Retire?

Historically, some retirees have relied upon the 4 percent rule to determine how much retirement income they may need. This rule states that you can withdraw 4% from your retirement savings per year and leave enough intact for the remaining years. If you follow this method, you could take a look at the amount you’ll expect to have saved when you retire and calculate 4 percent to find out how much you’d have each year.

But it isn’t quite that simple. Inflation and poor investment performance means that 4 percent might not cover later years. Some experts also question whether 4 percent would last as long as you’d need, especially as life expectancies increase. If you want to try this out, though, you can find 4 percent rule calculators out there that will help give you an initial estimate of what your retirement income may look like.

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Earning Income in Retirement

If you’re married and calculating how much a couple needs to retire, it’s important to consider whether your spouse will be working after you retire. That income will help for a while. But whether you’re single or married, you may be planning to continue to work after you retire to stay busy or just do something you love.

Before you decide to keep working, though, it’s important to know the income limits you’re facing. Once you’ve reached full retirement age in 2021, you can earn up to $50,520 before your Social Security benefits are reduced $3 for every $1 you earn. Those who start taking those benefits early can only earn $18,960 before benefits are reduced $2 for every $1.

Retiring with Social Security

After you set your retirement budget, it’s time to calculate how much money you’ll have. Determining how much money will I have when I retire starts with Social Security. The Social Security Administration looks at your 35 highest earning years to calculate your monthly payment. But if you retire early, this will be reduced.

The Social Security Administration offers two very helpful tools that can help you figure out how much you can expect to make. The best is the Quick Calculator, where you’ll provide some basic information and get your expected benefit, either in today’s dollars or adjusted for inflation. If you plan to retire early, you’ll need to take a look at the Retirement Benefits Chart at SSA.gov. This will show the age you’ll reach full retirement, as well as how much your benefits will be reduced if you retire at age 62 or in the months between 62 and your full retirement age.

Retirement Savings

Once you’ve determined how to calculate retirement income from Social Security, it’s time to look at your other sources of income. If you have any retirement savings accounts, gather the paperwork and prepare to crunch the numbers. For the 26 percent of Americans who have access to a defined benefits plan, also known as a pension, it’s important to look specifically at those documents and the minimum retirement age to get an accurate picture of what you can expect.

If you have a defined contribution plan like a 401(k) or 403(b), or you hold an IRA with a financial institution, your rules are set by the government. You can start withdrawing money from your 401(k), 403(b) or IRA at age 59½ without penalty. If you put the money into those accounts pretax, though, you’ll owe taxes on the funds when you take them out.

Saving vs. Investing

If you’re comfortable with a little risk, investing the funds might be a better way to save for retirement. Depending on your investment goals and risk tolerance, there are a number of potential investment strategies that could help you work towards the retirement you envision. Money invested in the stock market carries more risk but also offers the potential for more growth than what you’d earn if you put it in an interest bearing savings account. There are also options like CDs if you aren’t comfortable putting your trust in the stock market.

But there are other investments you can make. Your home is an investment, for instance. If you buy in a growing market and your home value appreciates over the years, you can sell and downsize at retirement, using the extra money you earn on the sale to live on. You can also invest in real estate or start a business that will provide passive income long after you’ve left the workforce, although all of these options bring an element of risk.

Final Thoughts

Planning for retirement can be tricky, but as long as you can estimate retirement income and expenses, you can start working toward having the money you’ll need. The earlier you can start planning, the better. For best results, work with a Certified Financial Planner® who can use their expertise to go over your numbers and help steer you in the right direction.