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You probably already know how important it is to plan for retirement, but where do you begin? One of your first steps is to estimate how much income you’ll need to fund your ideal retirement. But that’s not always as easy as it sounds because retirement planning is not an exact science. Everyone will have different priorities when it comes time to retire. Your needs will be unique and depend on your expenses, goals, and lifestyle.

The key takeaways from this blog are:

• Retirement Expenses and Current Income

• Retirement Age and Life Expectancy

• Retirement Income

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Retirement Expenses and Current Income

A good starting point is to use your current income to figure out how much income you will need during retirement. Discussing desired annual retirement income as a percentage of your current income is common, and that percentage could be anywhere from 60% to 90% or even more. The appeal of this approach lies in its simplicity and the fact that there’s a reasonably common-sense analysis underlying it: Your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage to reflect the fact that there will be certain expenses you’ll no longer be liable for (e.g., payroll taxes) will, theoretically, allow you to sustain your current lifestyle.

The problem with this approach is that it doesn’t always account for future scenarios. For example, if you intend to travel extensively in retirement, you might need 100% (or more) of your current income. While it is a good idea to use a percentage of your current income as a benchmark, it’s still worth going through your current expenses in detail to settle on a more accurate number that considers all your retirement goals.

Your annual income during retirement should at least be enough to meet your retirement expenses. Estimating these expenses is the most significant piece of the retirement planning puzzle, but you may need help identifying them and projecting how much you’ll be spending. Start with your current outflows and identify which expenses will disappear in retirement and add any expenses that will start or increase in retirement.

Additionally, keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage early in retirement while other expenses, such as health care and insurance, may increase as you age. Remember that the cost of living will go up over time too. Over the past 20 years, the annual inflation rate has been approximately 2%, however, you should take into account the recent increase in inflation. To protect against these variables, build a comfortable cushion into your estimates. Finally, you may want to have professional financial help with your estimates to ensure they’re as accurate and realistic as possible.

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Retirement Age and Life Expectancy

Another factor to consider is how long you’ll be retired. Deciding when to retire typically revolves around your personal goals and financial situation. You may see yourself retiring at 50 to get the most out of your retirement. Maybe a booming stock market or a generous early retirement package will help make that possible. But it’s important to remember that retiring at 50 versus retiring at 65 will require an additional 15 years of funding.

The other important factor to consider is your lifespan and the risk of outliving your savings. You can try to estimate your life expectancy using government statistics, life insurance tables, or a life expectancy calculator. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There’s no way to predict how long you’ll live, but with life expectancies rising, it’s best to plan for a few extra years of retirement.

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Retirement Income

Once you have a good idea of your retirement income needs, you can assess how you will meet those needs by reviewing the sources of retirement income will be available to you. Common sources include employer pensions and Social Security that provide monthly benefits. Additional sources of include a 401(k) or other retirement plan, IRAs, annuities, and other investments. The income you receive from those sources will depend on your investment, the rate of investment return, and other factors. Lastly, if you plan to work at all during retirement, your job earnings would provide another source of income.

With careful planning, your expected income sources may fund a lengthy retirement, however, if there is a gap you can take steps prior to retirement to bridge the gap. A financial professional can best help you figure out how to make this happen, but here are a few suggestions:

• Try to cut current expenses so you’ll have more money to save for retirement.

• Shift your assets to investments that have the potential to substantially outpace inflation (but keep in mind that investments that offer higher potential returns may involve greater risk of loss)

• Lower your expectations for retirement so you won’t need as much money (no beach house on the Riviera, for example)

• Work part-time during retirement for extra income.

• Consider delaying your retirement for a few years (or longer)

You want to retire comfortably and without worry when the time comes, so it is essential to start analyzing your current income and expenses to help paint an accurate picture of the amount you will need during retirement.