It’s the eternal question… How can you know if you’re saving enough for retirement? If you’re a millennial retirement may be 40 years in the future and how can you even fathom what it will be like or how much money you may need? Many financial planners will provide you with guidelines such as having the same amount as your annual salary in retirement savings by the time you are thirty, but I’m not necessarily a fan of those rule. Everyone is different and their needs for retirement are different, so instead here are some guidelines to frame your thoughts on retirement and to calculate if you’re doing enough to get there.

Envisioning Your Ideal Retirement

I probably think about retirement daily. Not from a money perspective, but from an experience perspective. While I’ve enjoyed living in Philadelphia for over 13 years now, I grew up in the countryside of New York state and I long to spend my retirement in a place surrounded by trees and greenery. On weekends we’ll make our way to a small town nearby and have pancakes and coffee at one of the local spots. We’ll travel from time to time, but still be homebodies most days. Oh, and I’ll still be working. That’s right… In my ideal retirement scenario I will still be working because I love the sense of accomplishment that I get from achieving work goals.

What is your ideal retirement? Does it include any type of work or is the idea of working during retirement completely repulsive to you? Do you plan to travel constantly or treat your home as a sanctuary? Would you like to downsize your living space from your current arrangement, or do you plan to move someplace significantly more expensive? These are all questions to ask yourself when planning for retirement. It’s also important to get on the same page as your partner. You can do as much plotting as you’d like, but if your other half isn’t on board, you really haven’t made much progress. Additionally, remember that these are just your wishes as you know them at this point in time. Nothing is set in stone and you’re allowed to change your goals as often as you like. Just be sure to revisit your retirement cost calculation as well.

Calculating the Costs

So how do you calculate how much income you will need each year during retirement? The best place to start is typically with how much you spend now. Hopefully you are tracking this through a monthly budget, but if not it may be time to start. Look at your monthly costs and cross out anything you will no longer need to pay come retirement. For instance, I plan to retire in approximately 30 years, and at that time I will have my house paid off and my child will be grown and (hopefully) financially independent. As a result, I can cross off our monthly mortgage cost (though be careful to include property taxes and homeowners insurance which may be baked into your monthly payment) and I can cross out our childcare expenses. However, I do expect to travel more, so I’ll add in extra expenses for how often I expect to travel. Other common expenses that you may be able to drop are work clothes, commuting costs, retirement contributions, and hopefully debt payments. You also may spend more on health care costs and gifts for all those grandchildren you hope to have. Once you have one month nailed down, just multiply it times 12 to get your annual cost. Financial advisors typically will recommend 60-80% of your current income as your annual cost, but I find starting with your budget to be a beneficial exercise if you have the patience for it.

Sources of Income

There may be several sources of income that you can count on during retirement. Pensions and social security are the easiest to calculate. You should be able to monitor the status of your pension through your employers, and here is information on how to check your social security funds. Next are your retirement assets which may include 401(k)s, IRAs, and other non-retirement investment accounts. Additionally, if you’re like me, you may plan to have some form of income available during your retirement. If you’re trying to estimate how much you may earn during retirement, err on the side of conservative. In other words, underestimate the amount you think you might earn so you aren’t running a deficit once you retire.

Are You on Track?

Once you’ve figured out when you plan to retire and how much you think you will need to live on annually, you can start plugging some of these estimates into a calculator. You can use our retirement calculator here and run as many scenarios as you’d like. To do this you will also need to know how much you currently have saved for retirement, so this is a great time to evaluate your current net worth. It should give you a good idea of if you’re on target or need to step up your savings/push your retirement date back. It will even tell you how much more you need to save per year to reach your goal. For the annual interest rate, 5% is an average amount of growth, so you could use that if you don’t know how aggressive or conservative your portfolio is. If you still have questions, maybe it’s time to reach out to a professional.

Looking to save more for retirement? Read our article on the basics of investing for retirement. 

Written By: Lindsay Dell Cook

Lindsay Dell Cook is a CPA, finance writer, and founder of Budget Babble. She lives in Philadelphia with her uber supportive husband and adorable daughter. When she's not working, she enjoys spending time with her family, taking their lovable mutt for walks, or reading a good book while buried under a pile of cats.