The calculation of retirement need is simply an attempt to determine how much money you will need in your retirement. Such calculations are vital because they can show you the retirement income you will need and if your existing savings and investments will support you after retirement.
The first step in calculating retirement need is to figure out what lifestyle you would like after you retire. Then determine how much that lifestyle will cost and compare that figure to your savings and projected retirement income. Projected income is the amount of money that you think you will receive from Social Security, pensions, annuities, retirement plans and other sources.
Calculating Projected Retirement Income
The first step in calculating your projected retirement income is to figure out what your Social Security income will be. The Social Security Administration has a number of calculators online that can help you do this.
Once you have determined your Social Security add your income from other sources. Then subtract the income from the expenses, the difference is the additional income that you will. Do not add your retirement savings or investments in stocks or mutual funds to the income figure. Instead only add regular payments including Social Security, annuities, required withdrawals, pensions etc.
How to Give Yourself Additional Sources of Retirement Income
If you are like most people you will come up short in the income. Do not panic at this point, instead start looking for additional sources of retirement income. Some additional sources of income include deferred, indexed and immediate annuities, insurance policies and other sources of income.
A person that is about to retire and has a lot of cash can purchase a product called a Single Premium Immediate Annuity or SPIA that can provide a regular income payment for the rest of his life. A person who is still working can buy a deferred annuity which can be used to build up additional tax deferred income. When the person retires, she can begin receiving a regular payment from the plan.
Add Losses and Inflation to the Calculation
Part of the reason why should do this is no source of income is totally reliable or foolproof. Most stock based investments will loose value in bear markets. Real estate can loose value and it comes with additional costs such as utilities, insurance, maintenance and repairs. Money in savings, money market accounts and annuities will loose value due to inflation.
That means you should add losses and inflation to the calculation because they will occur. You can compensate for market losses by purchasing insured investments such as annuities. You can compensate for inflation by purchasing indexed and variable annuities which get part of their value from stock market indexes. Stock market gains usually “beat” inflation. An indexed annuity is insured to protect against losses and partially indexed to protect against inflation.
Something else you need to add your calculations is the loss of a major source of retirement income such as a pension. Major companies have eliminated pension plans or made big cuts to pension benefits in the past. Pension plans are insured by the government but this insurance will not pay retirees the same benefits. Therefore you should add something to your portfolio that can compensate for such a loss.