Retirement Budget

• Before you can start planning for retirement, you need to have an idea of how much you expect to spend once you stop working. Hopefully you already have a personal household budget in place, and if so you can use that budget template to estimate your retirement needs. Keep in mind that some expenses, like daily commuting and daily lunches, might go down, but other expenses, including health care and travel, are likely to go up. You might end up spending less in retirement, but you could end up spending more as well.
  
  

Guaranteed Income

• Once you know how much you expect to spend in retirement, it is time to look at the guaranteed sources of income you can expect to receive once you leave your employer. You should receive a statement from the Social Security Administration each year that shows your expected benefits, and if you are due a pension you should receive an estimate of those benefits as well. Add up all of those guaranteed sources of income, then compare that figure to your estimated retirement budget to see where you currently stand.
  
  

Income Shortfall

• After you develop your retirement budget and compare it to your sources of guaranteed income, you can determine how much extra cash flow you need to generate from your portfolio. If your pensions, Social Security checks and annuity payments give you most of what you need to live on, you might need very little in the way of extra money. But if you do need additional funds, you need to determine how much you need to save to give you that money without sacrificing your principal.
  
  

How Much to Save

• Once you know how much money you need each month to meet your retirement expenses, you can use that figure to estimate how much you need to save for retirement. Many retirement planning experts recommend withdrawing no more than 4 to 5 percent of your portfolio the first year in retirement, then adjusting that withdrawal amount each year to account for inflation. That means that a portfolio of $500,000 would yield between $20,000 and $25,000 per year in income. Calculating how much you need each month, then annualizing that figure, allows you to determine how much you are likely to need for a comfortable retirement. For instance, if you need $2,000 a month in additional income and are comfortable with a 5 percent initial withdrawal rate, you would need a starting portfolio of at least $480,000.