Most people don’t really think about how much they will need in retirement. This applies to business owners as much as it applies to anyone else. Even if you are self-employed — especially if you are self-employed — you need to take a step back and figure out how much you will need in retirement.
It’s important to set money aside for your future because no one else will do it for you. Here’s how to figure out how much you will need in retirement:
What Will Your Retirement Look Like?
Your first step is to determine what your retirement will look like. My reality is that retirement will probably look a lot like what I do now. I’m not interested in stopping work and doing nothing all day. I like writing, and I have a lifestyle I enjoy right now. I volunteer, travel, and engage in local causes. I might write about different things, and I might travel more than I do now, but I don’t expect to stop freelancing until I absolutely have to.
Take a look at your own goals. What do you want to do in retirement? Do you want a second career? Do you want to volunteer more? Travel more? Consider what “retirement” looks for you. Chances are it isn’t “traditional,” and that makes a difference in what you will need during retirement.
I know that eventually my body will give out and I will probably need long-term care or something similar, so I am saving up for that reality. In the meantime, though, I expect my “retirement” will be a variation of what I do now.
Consider Monthly Needs and Cash Flow
Once you know what you want your retirement to look like, consider your monthly needs and cash flow. Basing your retirement needs on what you expect to live on each month is a good way to break it down into something manageable. I start with my current cash flow and expenses. Look at your own. What are you doing now, and how much does your lifestyle cost each month. Research what the differences might be if you change things up a bit.
I look at different scenarios. If I decide to remain with Idaho as my home base, I will downsize after my son finishes high school and my monthly living expenses will decrease. However, I also know I will travel more, so that will balance out. If I move out of Idaho to a more expensive city (which I might prefer), my downsizing will still put me in a living situation close to my current costs.
Once you have an idea of which items will cost less and which will cost more, you can determine how much you will need in retirement as it relates to monthly cash flow. You can then use that number to determine how much of a nest egg you will need to build in order to supply that.
Of course, if you plan to create income during retirement, a large nest egg might not be as necessary. I am on track to have between $800,000 and $1 million when I think I will need it, and it will likely be enough for me because I know that the first couple decades of my “retirement” will involve writing if at all possible.
What are your plans for retirement? Do you know how much you will need in retirement?