Planning ahead

Part of planning for retirement is calculating how much you'll need to support yourself and the people who depend on you. As a rule of thumb, you can estimate that you'll need about 80% of your pre-retirement income to maintain your standard of living. And the amount you need will increase over time due to inflation.

If you're close to retirement, that amount should be fairly easy to calculate. But if you're many years from retiring, though, how can you tell what you'll need? One way is to use a retirement planning calculator that takes a number of factors, such as inflation and projected wage increases, into account.

Questions to ask

You'll need to identify the different sources of income you know you'll have:

• Will you be receiving a pension from your employer? Do you know how it will be calculated?
• Do you save money in an employer sponsored retirement savings plan? How much have you accumulated? What will this be worth when you're ready to retire?
• How much can you expect from Social Security? Check the annual statement that the SSA provides. It should arrive about three months before your birthday each year.
• Do you contribute to a tax-deferred savings plan on your own? What's your current balance?
• How much, if anything, do you already have set aside specifically for retirement in taxable accounts?

Then, you'll want to add up the amount you expect to receive from each source. Sometimes — in the case of a pension, for example — you'll have a fairly clear picture. But it can be more difficult to estimate income from your tax-deferred and taxable savings plans. Because their returns are not guaranteed, what you'll have available will depend on how much was invested, where it was invested and how those investments performed.

Taking the next steps

Once you know how much progress you've already made, you'll be able to start filling in potential gaps in your retirement plan. That may mean setting aside more of your income now, and making investment decisions that will help to increase the value of your savings. You can tackle this task in a number of different ways, including participating in a 401(k) or other employer sponsored retirement plans, opening an individual retirement account (IRA), buying annuities, and putting more savings into taxable investment accounts.