By using the template in the prior post, you can get a good idea of your current living expenses. It’s amazing how many people spend without any idea of what daily life costs them. If you have the approximate number of your current expenses, how do you get to the number you will need in retirement? You can begin with the baseline assumption that, when you retire, you will live just about as you are now, with a few changes:

  • subtract commuting and other expenses of working.
  • add something for additional medical and dental expenses; perhaps double what you’re spending now.
  • add something for vacations and other fun things to do in retirement.

Now, you have an idea of what retirement would be like, and cost, if you just continued your current lifestyle. That’s your baseline. You can live at a higher level and estimate higher expenses to do so; or you can assume you will cut back to a more modest lifestyle, which many people find difficult to do. But the baseline gives you a starting point of what a “normal” retirement would cost.

Once you know that, it’s time to consider where you will get the income to pay for that retirement. Social Security will be a part of it, perhaps not a large part. If you or your spouse is entitled to a pension, that will be another piece. Beyond that, there are two sources of retirement income: your accumulated retirement account, whether in a 401(k), profit-sharing, 403(b) or 457 plan; and any income you earn by working in retirement. Actually, the amount you “plug in” as income earned from working will depend on how your retirement account covers your remaining living expenses. So we are at the point of considering the remaining living expenses not covered by other sources and what retirement account is needed to cover them.