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Figuring out your retirement needs is not an exact science. At best, you can only provide rough estimates based on assumptions involving factors that are often beyond your control. In spite of the difficulties involved, you must try to predict what your income and expenses will be after you retire so you can start planning (and saving) today.
When considering your retirement, your perceived needs, just like your perspective on life, will change at different times in your life. Roughly speaking, the extent of your retirement needs will appear differently at three different phases of the planning process: the initial phase, the middle phase, and the pre-retirement phase.
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Initial needs assessment phase. Initially, your retirement needs assessment is more like a wish list. Hopefully, you have started planning and saving for retirement early. At this point, you perceive a comfortable retirement as very attainable and a richly deserved reward for your hard work through the years. Your desire may be to have little or no change in your current lifestyle and spending. Additionally, you may want to treat yourself to an expensive reward, like a trip around the world, when you retire.
Although dreams really do come true, your initial needs assessment seldom remains intact for very long. It's a great start, though. After all, if you are going to aim for something, you might as well aim high.
Middle needs assessment phase. Throughout this material, you are reminded that the retirement planning is an ongoing and life-long process. For the majority of your life and the planning process, your retirement needs will appear differently to you. For example, when you are young and getting by with little income, it may not seem like you will need a lot later in life. As you get older, though, you may develop more expensive tastes and hobbies (like golf) that will have to be factored into your needs assessment.
In another scenario, you may have aimed high with your needs assessment, but life events like health problems or college expenses for the kids come along. As a result, your needs assessment may be pared down to a bare minimum to make up the shortfall in retirement funds.
Don't be alarmed when this happens. This is normal and happens very often when reality collides with your retirement dreams. Just be aware of this and, whatever you do, don't give up on saving for retirement.
Pre-retirement needs assessment phase. Right before retirement, the estimates of your retirement needs are probably the most accurate. For the most part, you only have to look at your current lifestyle and expenses to project what you will need after you retire. If special costs or expenses need to be factored in, their cost is relatively predictable.
However, this does not give you the green light to wait until before your planned retirement to start considering your retirement needs. Before retirement, your understanding of your needs may be greater, but your time to make something happen financially is limited. So, you need to make some attempt to project your retirement needs right from the start. Then you can update your needs assessment as you go along.
As for actually calculating your retirement needs, there are numerous ways to do so, most of which don't involve calling a psychic hotline or performing a tarot card reading. We provide you with the two most frequently used methods and guide you through each of them.
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