To live well in retirement, you no longer can rely solely on a company pension plan or Social Security. Instead, you will have to depend on how skillfully you plan and invest, and whether you make good use of tax-advantaged savings plans such as 401(k)s and IRAs.
Step 1: First, estimate how much you will need. One rule of thumb is that you’ll need 70% of your annual pre-retirement income to live comfortably. That might be enough if you’ve paid off your mortgage and are in excellent health when you retire.
But if you plan to build your dream house, travel or get that Ph.D. you’ve always wanted, you may need 100% of your income or more.
Remember, too, that your health care expenses are likely to go up in retirement, especially if you retired prior to being eligible for Medicare and must purchase insurance on your own.
Step 2: Second, figure out how you’ll meet those expenses. There are three main sources of retirement income: Social Security, pensions and annuities, and your savings. Start by determining your estimated Social Security benefits. (If you haven’t already received a statement in the mail, you can order one online or use an online calculator to make estimates based on expected earnings.)
Related: Will you have enough to retire?
Step 3: Next, add in any annual payouts you expect from an annuity or company pension.
If it’s not enough, it’s time to think about where the extra money will come from. Count on needing at least $15 to $20 in investment savings to cover each dollar of that shortfall. If your projected retirement expenses exceed Social Security and pensions by, say, $20,000 a year, that means you’ll need a nest egg of $300,000 to $400,000 to bridge the gap.
CNNMoney’s Retirement Savings Planner can help you come up with an estimate of how large a nest egg you’ll need. And our asset allocation tool will help you find the right mix of stocks and bonds to help you build it.
CNNMoney (New York) First published May 29, 2015: 3:11 PM ET