You know how important it is to plan for your retirement, but where do you begin? One of your first steps should be to estimate how much income you’ll need to fund your retirement. That’s not as easy as it sounds because retirement planning is not an exact science. Your specific needs depend on your goals and many other factors.

Use Your Current Income as a Starting Point

It’s common to discuss desired annual retirement income as a percentage of your current income. That percentage could be from 60 percent to 90 percent, or even more depending on whom you’re talking to. The appeal of this approach lies in its simplicity and that there’s a 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 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 account for your specific situation. For example, if you intend to travel extensively in retirement, you might easily need 100 percent (or more) of your current income to get by. It’s fine to use a percentage of your current income as a benchmark, but it’s worth going through your current expenses and thinking about how those expenses will change over time as you transition into retirement.

Project Your Retirement Expenses

During retirement, your annual income should be enough (or more than enough) to meet your retirement expenses. That’s why estimating those expenses is a big piece of the retirement planning puzzle. But you may have difficulty identifying all of your expenses and projecting how much you’ll be spending in each area, especially if retirement is still far off. To help you get started, here are some common retirement expenses:

• Food and clothing
• Housing: Rent or mortgage payments, property taxes, homeowners insurance, property
• upkeep and repairs
• Utilities: Gas, electric, water, telephone, cable TV
• Transportation: Car payments, auto insurance, gas, maintenance and repairs, public
• transportation
• Insurance: Medical, dental, life, disability, long-term care
• Healthcare costs not covered by insurance: Deductibles, co-payments, prescription
• drugs
• Taxes: Government and/or state income taxes, capital gains tax
• Debts: Personal loans, business loans, credit card payments
• Education: Children’s or grandchildren’s college expenses
• Gifts: Charitable and personal
• Savings and investments: Contributions to retirement accounts, annuities, and other
• investment accounts
• Recreation: Travel, dining out, hobbies, leisure activities
• Care for yourself, your parents, or others: Costs for a nursing home, home health aide,
• or other type of assisted living
• Miscellaneous: Personal grooming, pets, club memberships

Don’t forget that the cost of living will go up. The average annual inflation rate over the past 20 years has been approximately 2 percent. You must remember that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children’s education early in retirement. Other expenses, such as health care and insurance, may increase as you age. To protect against these variables, build a comfortable cushion into your estimates (it’s always best to be conservative). Finally, have a financial professional help you with your estimates to ensure they’re as accurate and realistic as possible.

Decide When You’ll Retire

You can’t just estimate how much annual income you need to determine your total retirement needs. You also must estimate how long you’ll be retired. Why? The longer your retirement, the more years of income you’ll need to fund it. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, 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 make that possible. Although it’s great to have the flexibility to choose when you retire, it’s important to remember that retiring at 50 will cost you a lot more than retiring at 65.

Estimate Your Life Expectancy

The age at which you retire isn’t the only factor determining how long you’ll be retired. The other important factor is your lifespan. We all hope to live to an old age, but a longer life means that you’ll have even more years of retirement to fund. You may even risk outliving your savings and other income sources. To guard against that risk, you must estimate your life expectancy. You can use government statistics, life insurance tables, or a life expectancy calculator to reasonably estimate how long you’ll live. 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 on the rise, it’s probably best to assume you’ll live longer than you expect.

Identify Your Sources of Retirement Income

Once you have an idea of your retirement income needs, your next step is to assess how prepared you are to meet those needs. What sources of retirement income will be available to you? Your employer may offer a traditional pension that will pay you monthly benefits. Additional sources of retirement income may include a retirement plan, annuities, and other investments. The income you receive from those sources will depend on the amount you invest, the rate of investment return, and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.

Make Up Any Income Shortfall

If you’re lucky, your expected income sources will be more than enough to fund even a lengthy retirement. But what if it looks like you’ll come up short? Don’t panic—there are probably steps you can take to bridge the gap. A financial professional can help you figure out the best ways to do that, but here are a few suggestions:

• Try to cut current expenses so you’ll have more money to save for retirement.
• o Shift your assets to investments with the potential to substantially outpace inflation.
• (but remember that investments that offer higher potential returns may involve a 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).

Hargreaves Financial Pty is a provider of investment advice and dealing services to corporate, sophisticated, professional and private clients.