How to calculate your retirement income needs

1. If you are using a retirement calculator, you only need to input your current age, retirement age, current income and your projected salary increase/ inflation.
2. You can determine your pre-retirement income on a scientific or financial calculator by stating your salary increase/ projected inflation as a common ratio (for example a 5% increase would be 1.05).
3. Then, work out that ratio to the power of the number of years that you have until retirement. For instance, if you have thirty (30) years to retirement, your income would increase by a factor of 1.05 to the power of 30.
4. Multiply that factor by your current income. The result is your pre-retirement income

Your desired retirement income is your pre-retirement income multiplied by your target percentage of retirement income. Your target percentage should not be lower than 70%. For example, if you have a target percentage of 80% and your pre-retirement income is $100,000.00, then your desired retirement income is $80,000.00 ($100,000 x 0.8).

It is likely that you would be entitled to pension benefits, such as company pensions or state benefits like Social Security or National Insurance. It is necessary for you to project or prudently estimate the amount of those benefits and deduct it from your desired retirement income. For example, if your pension benefits total $30,000 and your desired income is $80,000, you still have to make up the difference ($50,000).

This is where your average accumulation rate comes in. For simplicity, assume that your chosen accumulation rate is 10%. With the amount from Step 3 ($50,000), this means that you need $500,000 as a lumpsum to have money working for you ($50,000/ 10%). Some persons might multiply $50,000 by the number of years in retirement. However, given that you should expect to live for 20-30 years in retirement, this would not give a practical result.

Hopefully, you would have started saving for your retirement already. It is important to determine the future worth of these plans at retirement and total the likely future value for each retirement savings account or plan. You determine the future value of each plan by using the following information:

1. Number of years from the start of the plan to your retirement age
2. Accumulation rate of the plan
3. Modal savings/ contributions

Step 6 involves comparing the results of Step 4 to the result of Step 5. If your retirement savings would exceed your lumpsum needed, then you are right on track and need go no further. However, if the opposite is true, then you have a retirement shortfall, which you need to address in Step 7.

Once your shortfall is established, you need to do what you can to eliminate or reduce it. Your shortfall represents the future value or goal. You need to work out how much you need to save towards that goal, given the following:

1. The number of years you have left until retirement
2. The likely accumulation rate you would achieve
3. Any modal lumpsum contributions you can make

From this, you should be able to calculate what your modal contributions to your retirement plan should be.

The great thing about working out your retirement income needs is that it is all about you. You have a degree of power in determining the direction that you wish to take. Calculating your retirement income needs is an iterative process as well. While there are some independent variables in the calculation, you have the power to change certain variables and include them in subsequent calculations to observe how they might affect your retirement.