WHAT WILL IT COST

Pundits say you will need 60% to 85% of your gross household income today to sustain the same lifestyle after you retire. In theory, the higher your income today, the closer you are to the lower end of that scale. Fair enough, but you should look at this issue in a slightly different fashion.
Sure, we could sit down to a long, drawn-out process in which we look at our expenses and try to anticipate what they would be in retirement. But why bother? After all, retirement is a long way off, and we have no real idea of what those expenses will be then.
You do, though, know that you live comfortably today (we hope) and that it's unlikely you'll be saving money or paying FICA (unless you choose to work) after you retire. Therefore, excluding those items from your gross income, you can come up with a number that's fairly close to what it would take to sustain your current lifestyle.
Simply put, you want a retirement income that equals our gross income today less all savings and all FICA taxes.
But you still have to decide what income you will need in retirement to live the way you want. Some folks can get by on much less than they use now, while others may decide they want more. It's a personal choice for all of us. So, pick a number.
Now, let's talk about inflation. How much does our retirement savings have to be in the year we retire after it has been adjusted for inflation over the years between now and then? What should that inflation rate be anyway?
For how many years will you draw that income? Should it keep pace with inflation throughout those years? Will you draw down your starting retirement portfolio to support your income needs or just live off the earnings while never touching the principal? If you can answer those questions, then you can determine the starting portfolio you need at retirement to support you for the rest of your life.
We're getting into the realm of some pretty sophisticated calculations based on several assumptions that, if changed, could radically alter our results. What we need is a quick-and-dirty way to give us an idea of what we need to do to get started. We'll save the more esoteric efforts for later.
So forget about inflation for the moment. Ignore Social Security and any company pension you may get. Pretend your money gets no return now or after retirement. But do count whatever you have saved for retirement as of today.
Let's say that amounts to $20,000. Further, let's say you want an annual income of $30,000 in today's dollars after you retire. You expect to retire in 25 years, that you will live 20 years after you retire, and that you expect to meet your maker waving your last dollar bill.
How much do you need to amass by the start of your retirement to support yourself in your golden years, and how much do you have to save each year between now and then to get there?
Let's see. You need $30,000 a year for 20 years, so that comes to $600,000 needed in the first year of retirement. You already have $20,000 of that, so that means you're only $580,000 short. Divide the shortage by the 25 years you have to save it up, and you discover you only have to cough up $23,200 annually between now and the time you retire to a life of leisure.
Too much is omitted from this simple approach to provide a meaningful answer to the question at hand. Worse, the answer we do get makes the whole idea of saving for retirement seem to be an impossible task, but this is far from true.
To do things right, we must take a cold, hard, objective look at our desired income, subject it to a rational choice of assumptions, and make some detailed calculations.
The best way to do the calculations is with one of the readily available software packages available commercially, such as Quicken Financial Planner or you can find many different financial calculators online that can help.
Before you use any of these tools, you need some preliminary information. At a minimum, you want to:
1. Decide on the annual income you desire in today's dollars.

2. Pick a retirement date.

3. Determine your lifetime average inflation rate.

4. Determine the average rate of return you expect on your investments before and after retirement.

5. Determine the current market value of all your investments to include regular accounts, IRAs, and company tax-deferred savings plans like 401(k) plans.

6. Obtain an estimate of any company-provided pension benefit.

7. Obtain an estimate of future Social Security benefits

8. Armed with this data, you can determine the annual savings required for you to enjoy the good life. You will also be able to play "what if" games and see the results quickly should you decide to vary things like inflation, rates of return, date of retirement, and desired income.
We'll leave you with one last thought. The earlier you start, the easier it will be for you to amass the dollars you will need on the day you retire.
Say you put $1,000 per year for 25 years into an investment earning 10% annually, you would have $108,182. Wait just five years before starting that process, and on the same date in the future you would end up with $63,002. That $5,000 you "saved" by waiting just cost you $45,180 in tropical drinks.
Your employer can be a great place for you to start with to find the money that you need.