The most important question you must ask yourself is how you want to live when you retire. Will you need more or less money than you are earning now? You should be realistic in answering this question. Most financial planners estimate that your retirement needs will be about 70 to 80 percent of your pre-retirement income, although some individuals may need more. Examine your own situation, estimate how much retirement income you will need, and then work towards achieving that goal.

To make your estimation, start with the amount of money you currently earn on an after-tax basis. Then multiply this amount by the percentage of your income that you want to have for basic living expenses annually during retirement; this amount is usually between 70 and 90 percent of your current income. Some of your retirement goals may require you to save an annual amount in addition to this base amount—these goals may include visiting your grandchildren, going on a mission, going on vacations, and so on. Add this additional amount to your base amount to estimate your after-tax, annual living expense. Your annual living expense is your mandatory costs in retirement: housing, food, medical, transportation, etc.

Next, use the estimation of what your tax rate will be during retirement to calculate your before-tax, annual living expense. For most of the funds in your retirement accounts, you will need to pay taxes when you make withdrawals. Estimate conservatively. To calculate the amount you will need for your before-tax, annual living expenses during retirement, divide your annual living expense estimate by the result of one minus your estimated tax rate. This calculation will give you an estimate of the before-tax, annual living expense in today’s dollars. From the Tax Planning section of your Personal Financial Plan, you know your average tax rate currently. This is a good starting point for estimating your tax rate in the future.

Finally, adjust this before-tax estimation to account for inflation both before retirement and after retirement. Using a financial calculator, solve for the amount you will need to save after inflation has been accounted for. Set the present value equal to the amount of before-tax, annual income you will need during retirement; set N equal to the number of years before you retire; and set I equal to the estimated inflation rate. Then solve for the future value; the result will be the amount of money you will need in the first year (in future dollars) of retirement.