There exists the belief that assessing your retirement needs is difficult as it is impossible to accurately anticipate the future. However, retirement planning allows you to model your future based on known variables in the present. What makes it easier is that retirement needs assessment is unique to an individual.
The first step to assessing your retirement needs is to ask yourself "How do I envision my retirement?". The answer gives you an idea of what lifestyle you'd like to have. Whether you wish to maintain your lifestyle or increase your standard of living, will have a major impact on financial considerations.
The next step is to translate your anticipated lifestyle into expenses. For those who do not have extravagant retirement dreams (travel and other luxuries), a simple assessment of expenses would do. In assessing how much you will need in retirement, it is essential to use a figure from the present and convert it to a future value- usually on the basis of headline inflation.
Ask yourself how much of you present income you can survive on comfortably for a thirty-year period and project that amount to a future value (at your retirement age) based on a projected headline inflation rate. Your retirement age and ambitions should provide a guide to how much you need.
A simple lifestyle may require only 80% of your income, whereas catering for a longer retirement period suggests that you should be aiming for a higher percentage. You should also include contingent retirement expenses. That you may have fewer living expenses in retirement is not an invitation to be too conservative with your estimate. Higher medical expenses and emergency money must also be catered for.
Once you have an idea of the income replacement ratio, you then need to convert this to your desired yearly income in retirement. You must decide how much money you will need to have working for you in order to receive that projected annual retirement income. For example, if you need an annual income of $100,000.00 for retirement and you feel that a return of 8% is a rate of return that you can achieve, then you'll need to accumulate a fund of $1,250,000.00 to provide that income.
In assessing your retirement needs, some basic information is required:
a) Retirement age
b) Current age
c) Current income or expenses
d) Retirement income replacement ratio
e) Projected inflation
f) Average long-term interest rate or rate of return
It is not enough to just know what your retirement needs are and the enormity of the figures involved. The main reason for retirement planning is to take action now so that you can achieve that goal later. Its purpose is to help you to determine how much you need to save and where you need to invest if you are to have a comfortable retirement. It must be noted that a comprehensive retirement analysis caters for inflation before and during retirement. Several financial calculators can help with this.
The great thing about your retirement needs is that it's all about you! You need money to live at any time in your life. Retirement needs assessment only indicates how much you may need at that juncture. As with any other aspect of financial planning it is important to be prudent. Prudence, in the context of retirement needs assessment, means having more instead of less. Indeed, it is better for you to die with savings than live without!