One of the financial and life milestones we are expected to prepare for is retirement. While not everyone wants a “traditional” retirement that involves sitting around doing nothing and living off a nest egg, chances are that you will need to find some way of creating revenue to support yourself.
It makes sense to plan ahead, and figure out what you will need in retirement — or your approximation of it.
What Do You Want To Do?
The first step to figuring out what you will need during retirement. What do you want to do? In my case, I will likely keep writing for as long as I can. Hopefully, I will write different things, and be able to focus on some of my favorite subjects.
You need to figure out what you prefer to do during retirement. Do you want to forget work altogether? Or do you want to switch careers? Perhaps you want to volunteer, or pick up a new hobby.
Understanding your situation, and what you can expect to spend in terms money and time, is the foundation of figuring out what you need for retirement.
What Will It Cost?
The next step is to estimate what your preferred retirement lifestyle is likely to cost. One of the easiest ways to do this is to estimate it on a per-month basis. Start by approximating what you would need each month to live the way you want.
A good place to start is with your current expenses. Chances are that you will end up with expenses similar to what you have right now. You might end up tweaking your expenses, though. If you plan to travel a lot, your expenses might be higher than what you spend now each month.
You might also need to account for inflation, and understand that prices will likely rise at some point. Pay attention to what you spend now, so you know where the money is going. Then, consider what your spending would look like if you were living a retirement lifestyle (whatever you decide that lifestyle should be).
Where Will the Money Come From?
You should also have an idea of where the money will come from. If you plan to earn money while you are in retirement, you might not need to set aside as much money now, or worry about building a huge nest egg.
It’s also possible to plan for the future by considering investment income, and your efforts to build a business. You can also look into what you are likely to get from Social Security, although you might not want to rely overly much on that for your income.
Knowing where the income will come from is important. If you expect a large portion to come from your nest egg because you plan to stop working, you will need to build a bigger nest egg. Your nest egg will need to be big enough to cover your monthly expenses in retirement. If you need $3,000 a month to live in comfort and reach your goals, you might need to have $900,000 to withdraw what you need using the 4% rule (which might not be the best rule of thumb).
Cultivating multiple income streams is important if you want to come out ahead, though. You don’t want to have to rely too heavily on one source of income. If you can start developing other revenue streams now, you will have less to worry about if you lose one of your sources of income, and you will also have more options when you are ready to retire.
The sooner you have a better idea of where you stand, the better off you’ll be in the future.