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How much money will you need for your retirement?

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Everyone has imagined their ideal retirement, and I’m sure you have an idea in your head, too. No wonder, you work all your life to get to the point where you can retire.

So that you can enjoy that golden retirement without any surprises, it’s a good idea to crunch the numbers and find out how much money the retirement you have in mind will actually cost. In other words, how much you will need during your retirement.

How to calculate the cost of your retirement

There is more than one way to determine your retirement figure, some are simple while others are more complicated. For a simple calculation, one way is to estimate that you will need 70% of your usual income, while another way is to consider that 10 to 15 years of salary will be enough, because as a retiree you will spend less.

The truth is that these methods are fine for a rough approximation, but they are far from being what you should take into account to work out how much money you will really need for your retirement. The reason is very simple, they are general formulas that do not consider what you want your retirement to be like.

To perform a calculation that does take this into account, it is necessary to reflect and plan. In other words, think about your retirement and not just in a generic way: This is how it is done:

Step 1. Calculate the cost of living

This is the easiest part. These are your current expenses. The rule of thumb that you have already seen is that your expenses will be reduced by around 30% when you retire because you will be able to eat at home and you will not have to spend as much money on transport.

However, to find this figure you will have to review your budget or draw one up, if you don’t already have one. In this step, what you have to do is to calculate how much it costs you to live, your basic living expenses in terms of food, housing, household supplies, and so on.

That is the figure you should always keep in mind, because it is the bare minimum you need so that you can retire and, at the very least, not have to change your daily lifestyle.

Step 2. Estimate potential unforeseen events

One of the most common mistakes when planning for retirement and estimating the amount you will need is to think that you will be 66 years old, or whatever age you retire, forever. The sad reality is that it won’t be like that.

Once you retire you will continue to get older and that will have an effect on your health and your wallet. In Spain, thanks to the co-payment of medicines, your pharmaceutical bill will be lower than in other countries, but you should still take this into account and weigh up the cost of the increase.

On the one hand, because this co-payment only applies to medicines prescribed by the public health system, not by private insurance. And, on the other hand, because it is not something that depends on you, but on ministerial decisions.

In addition to medications, there are other health-related expenses, such as needing a walker, wheelchair, or a person to help you at home, among other things.

And beyond the toll of age, there are usually specific but predictable expenses, such as having to change household appliances, the car or pay for home repairs. In fact, if you live in an apartment with stairs, there will be a time when you may need to move home or put in an elevator.

Another option is monetize your home and search for another location when the time comes.

In any case, these are three examples of expenses you should keep in mind when working out the amount you need when you retire. In the worst case scenario, we could be talking about more than 1,000 euros a month if you need a person to help you at home.

Step 3. Calculate your dream retirement

Up to here we’ve been talking about fixed expenses. What retirement would look like if you didn’t lose any quality of life. However, it is more common to think of retirement as a time to enjoy yourself. After all, this is when you will have time to indulge in your passions, your hobbies and also to travel.

And what do all these things have in common? They cost money. Here is where you need to decide how many trips you want to take each year and where to, as well as their approximate cost. Also what hobbies you would like to pursue, whether you want to spend half the year in a second home or, if you have grandchildren, what you want to give them.

Step 4. Don’t forget inflation

This is perhaps the most complex step for most people. Once you know your retirement figure, you will need to update this in line with inflation, which marks the increase in the cost of living and is usually measured by the CPI.

This inflation will mean that the amount you have in mind today will be higher when retirement arrives. For example, if inflation is sustained at 1.5%, in order to maintain the purchasing power of 30,000 euros in 20 years time, you will actually need 40,400 euros. The reason? Everything will be more expensive and the nominal value of money will be lower.

How much you need per yearRate of inflationNumber of years until you retireHow much will you need when you retire
30,000.00 €1.50%1034,816.22 €
30,000.00 €1.50%1537,506.96 €
30,000.00 €1.50%2040,405.65 €
30,000.00 €2.00%1036,569.83 €
30,000.00 €2.00%1540,376.05 €
30,000.00 €2.00%2044,578.42 €
30,000.00 €2.50%1038,402.54 €
30,000.00 €2.50%1543,448.94 €
30,000.00 €2.50%2049,158.49 €
30,000.00 €3.00%1040,317.49 €
30,000.00 €3.00%1546,739.02 €
30,000.00 €3.00%2054,183.34 €

This is the annual figure you will need to maintain your lifestyle. To find the total you can multiply it by the number of years you expect to live. Current life expectancy in Spain is 83.3 years on average and continues to rise.

This means that you should have about 20 years ahead of you after retiring if you do this around the legal age (currently 66 years). You can multiply your annual figure by these years or refine the calculation using optimized formulas to make up the money.

How much will you have when you retire?

Once you have worked out the numbers, you will know the figure you need to reach. A different question is what your starting point will be. In other words, how much money do you have for your retirement now?

It is normal that you think about the state pension as your source of income, and that’s fine. The first exercise might be to find out how the state pension is calculated. If you prefer, you can use this simulator to get an approximation.

It’s easy for the figure to fall short of your target. What’s more, you can’t even be sure that this pension will stay the same until it’s time for you to retire.

The solution? Set up your own retirement pension or, if you prefer, complement the state pension with various investment products.