In the previous tutorial, we outlined the significance of retirement. Now, let’s talk about the how in retirement planning.

"How much money do I need to allocate to retire?" That is the first retirement question most people ask. However, there is no fixed amount that will assure everyone a sufficient retirement. Several factors are considered in retirement planning according to one’s standard of living, expenditures, and target retirement age. But people can possibly determine a good number for their retirement needs by answering few questions and crunching the numbers.

The following are the steps an individual has to complete before figuring out the size of nest egg for his retirement:

  1. Set the retirement age
  2. Decide on the annual income for retirement
  3. Consider timeline until retirement and expected life span
  4. Add the current value of savings and investments
  5. Determine the feasible annualized real rate of return on investments
  6. Obtain an estimate of a company pension plan’s value from plan provider, if any
  7. Assess the worth of social security benefits

Also, one has to consider the amount of money he can pass on to his children, as well as the taxes he will pay on investment income. Remember that any tax-deferred retirement assets will be levied at his standard income tax rate. If an individual has other retirement plans such as purchasing a house, pursuing hobbies, or traveling, include those also in financial projections.

Before doing all of the above-mentioned steps, always remember and integrate inflation. It can hurt a retirement plan in one way or another. No need to worry about this too much, just keep inflation in check when knowing the amount of money to be saved for a nest egg every month.

When mapping out a retirement plan, express all the figures in today’s dollars. Then, convert the numbers into tomorrow’s dollar after finding out the retirement needs. Just mix the two or the computation will be put to waste. Upon calculating using today’s dollars, a person can apply an inflation assumption to come up with a realistic estimate of the amounts.

Aside from the person’s personal circumstance, there are other factors affecting financial estimates, including poor investment returns, increased taxes, reduction of social security benefits, or sudden medical expenditures. This is where margin of safety comes in, an investing principle where an investor only obtains securities in case the market prices decline below its intrinsic value in order to minimize downside risk.

Essentially, in computing the retirement nest egg, begin with the bare minimum and try to allocate enough margin of safety by assuming the worst. And make sure the retirement plan can sustain you well into your golden years.