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Retirement planning: How to calculate your saving needs correctly

Many Americans don't save enough for retirement. To avoid this predicament, make sure you are using a retirement calculator to effectively calculate how much you should be saving right now.

The stats don鈥檛 lie: Americans aren鈥檛 calculating how much they need to save for retirement.

Over half of workers 鈥済uessed鈥� at a retirement savings target,听, with most landing on $1 million. It鈥檚 a nice, round number 鈥� but it probably isn鈥檛 an accurate one.

Your retirement needs depend largely on personal factors, such as future spending, wages, investment returns and life expectancy. It鈥檚 not hard to target them: A good听听can churn out a retirement savings goal and track your progress toward reaching it.

But you do need to come to the table with some knowledge about your financial situation, both current and future. Here are five steps to help you get the most out of a retirement calculator.

1. Do a little research

Many of the factors needed for an accurate calculation, such as inflation and wage increases, can be ballparked. In fact, most calculators will already have these baked in, often setting the default to 2% inflation and 2% wage increases. Your job is to determine if those defaults are accurate for you and adjust them as necessary.

In general, it makes sense to use the calculator鈥檚 projected inflation unless you have reason to believe it鈥檚 wrong. As for wages, think about your industry and history of salary increases 鈥� your Social Security statement will come in handy here. Often, the biggest jumps in salary happen听. If you鈥檙e toward the end, you may want to be conservative.

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2. Look at your investments

Retirement calculators also tend to default to an investment return. This is how they project how much money you鈥檒l have, based on your current retirement account balance and ongoing contributions. But how you鈥檙e invested plays a big role in what return you can expect.

鈥淏efore the last 15 years, it was pretty common to assume preretirement returns of 8% to 10% and retiree returns of 6%. The last 15 years have shown us that we can enter long periods of time where those averages aren鈥檛 the case,鈥� says Jeremy Portnoff, a certified financial planner and founder of Portnoff Financial in New Jersey.

A more conservative expectation is probably 6% to 7% preretirement and 4% after, but you should look to your specific investment strategy and your historical returns to guide you.

3. Estimate your spending needs

The best way to project future spending 鈥� which seems, on its face, impossible 鈥� is to look at your current spending. If you鈥檙e a budgeter, you鈥檝e got this step in the bag: Pull out last month鈥檚 version, assuming it鈥檚 typical. If you don鈥檛 regularly keep tabs on your spending, take a few minutes to jot down a list of where your money goes each month.

Then think about how that list will听: Many items will probably stay the same or go up with inflation, but will you have paid off your mortgage? Will you spend more on health care? (Probably.) Less on insurance? Consider all of these, plus taxes 鈥� which may be lower, especially if you鈥檝e saved in a听听鈥斕齛nd lifestyle expenses, then eliminate retirement savings contributions, since you鈥檒l no longer need to make them, Portnoff says.

4. Turn those spending needs into income needs

Once you have a good projection of how much you鈥檒l spend in retirement, you can turn that into how much income you鈥檒l need: Add up that monthly spending estimate into an annual estimate.

Retirement calculators typically ask you how much annual income you expect to need in retirement 鈥� the same as you earn now, a little less or a little more? Most people need to shoot for a little less, because expenses and taxes tend to go down and you鈥檙e no longer putting a portion of your income toward saving for retirement.

5. Revisit the numbers regularly

This isn鈥檛 a one-and-done exercise; in fact, you should probably rerun the numbers every year or after a significant lifestyle change. If you took a new job that aligns with your passion but lowers your salary, you鈥檒l need to adjust, for example.

Then there鈥檚 the market, which is always fluctuating. If a down year turns into a string of down years, you may need to make a change, Portnoff says.

鈥淓ach year you see the effect of those [market] changes. If it starts to look like a problem, you can adjust and say, 鈥業 might have to push retirement back or save a little more.鈥� That鈥檚 the importance of reviewing this regularly.鈥�

Arielle O鈥橲hea is a staff writer at听, a personal finance website. Email:aoshea@nerdwallet.com. Twitter:听

This article was written by and was originally published by听USA Today.

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