Wonder How Much You'll Need to Retire? Here's Where You Start

Whether you're counting the days until you can retire or dread the idea of giving up a job you love, it's important to know where you will stand financially in your golden years. If you have no idea where to begin with retirement planning, your first step is to draw up a post-retirement plan.

Create your own post-retirement plan

Whether you're 21 or 51, now is the time to draft a post-retirement budget. If it feels like a waste of time, I promise it's not. Although you'll have to update your plan as circumstances change, a plan is like GPS for your future.

And if you think you're too young to think about retirement, think again. The younger you are, the more time you have for investments in a brokerage account to grow. It's those investments that will help foot the bill for your post-retirement plans.

Coming up with an initial plan takes very little time. Here's how it's done, in three steps.

Step 1: Create an (imaginary) household budget

While none of us knows precisely how much we'll spend each month in retirement, we can make an educated guess. Jot down all the expenses you expect to have each month. Plan for expenditures like housing, car payments, property taxes, food, utilities, and medical care. If you plan to pay off a mortgage before you retire, you can omit that expense.

At age 65, you should be eligible for Medicare. However, Medicare is not free. In 2024, the standard monthly premium for Medicare Part B (the part of Medicare that covers most doctors' services) is $174.70 or more, depending on your income. There's also a $240 annual deductible, and you'll be responsible for 20% of Medicare-approved expenses for other medical services.

Estimates of how much you can expect to pay for medical care in retirement vary wildly. According to an RBC Wealth Management report, medical expenses in early retirement (including Medicare premiums) amount to nearly $6,500 a year, or $542 per month for one person. That amount doubles for a couple. The fact is, health care may be the largest expense any of us face in retirement.

Another thing you'll want to plan for is travel. If you dream of seeing the world, don't forget to factor it into your budget. Mark Bass, a financial planner in Lubbock, Texas, told AARP that travel is often the biggest expense a retiree faces in the first three years of retirement.

Step 2: Look at your predicted income

If you're looking to maintain your current lifestyle in retirement, one rule of thumb is that you'll need about 77% of your current income. Since you'll no longer be paying into Social Security or Medicare, won't have the expenses associated with a daily commute, and may end up in a lower tax bracket, you're not going to need as much as you needed throughout your work years.

Figure out how much you expect to receive in retirement, including all sources. They may include:

• Social Security payments (you can find out how much you're scheduled to receive at My Social Security)
• Pension payments
• Annuity payments
• Bonds
• Rental income
• Personal savings

Will that income be enough to cover your expected monthly expenses? If not, you have an idea of how much you need to save and invest. While no one knows how much investments will grow by the time they're ready to retire, we can look back at history. The average annual return for the S&P 500 over the past 100 years has been 10.6%. When you account for inflation, that's 7.4%.

Everyone is different, but when I calculate the expected return on my investments, I go with 7% to be on the safe side.

Step 3: Estimate how many years you'll need to cover

The tricky bit about planning for retirement involves the unknowns, like how long you'll live. However, calculators like the one provided by the Social Security Administration show you the average number of additional years a person can expect to live, based on their sex and date of birth.

For example, a woman born in 1992 is expected to have, on average, nearly 54 years left. Not only does the calculator show the life expectancy of that 32 year old, but it indicates how long they're expected to live after they turn 62, 67, and 70 -- the most common retirement ages. Obviously, it's not exact, but it does give you a number to work with.

Once you know how many years the average person your age lives, you can begin to plan for that many years. A whopping 43% of Americans worry that they'll outlive their savings. Having a specific number of years to plan for can help ease that concern.

Once you have a post-retirement plan of your own creation, you may want to consider meeting with a financial planner. A good financial planner can help fill in any gaps in your plan and offer ways to finance retirement, while also living your best life today.