A good way to make an accurate estimate of how much income you'll need is to keep track of your current living expenses for at least six months or as much as a year. This can help you project the amount of income you'll need in the future.
You should take into account that certain expenses will probably decrease (or go away entirely) and others will increase. Be sure to estimate these expenses for both you and your spouse. Here are some examples:
After you have a good estimate of all projected annual expenses for including "discretionary" expenditures, estimate the total amount you (individually or as a couple) will need for annual income.
Next, you need to estimate for how many years you will need that annual income. At what age do you plan to retire? 65? Earlier than 65? Later than 65? When does your spouse plan to retire? Also consider your life expectancies. Do family members routinely live into their 90's? Estimate the number of years you'll need income. Multiply the yearly income by the number of years. This will give you a rough estimate of the total amount you may need.
Remember that inflation over the years will increase the annual income that you will need to maintain the same standard of living. In recent years inflation has remained fairly low: since 1995, rates of inflation have ranged from 1.6% to 3.4% annually according to the U.S. Bureau of Labor Statistics. But even that range of annual increase in the costs of goods and services increases the total income you need. You can use the DCU calculator How Much to Retire to estimate the impact of inflation at various rates.
To determine an estimate of the total income you have given your current situation you need to gather information from several sources.
You can get an estimate of what you'll receive from Social Security. If you're over 25, then you receive an annual Social Security Statement about 3 months before your month of birth. (For example, if your birthday is in April then you should receive your statement in January). If you can't find your latest statement, you can request a statement at any time. You can also use one of the benefit calculators on the Social Security web site. Once you have a benefit estimate — either from your statement or from one of the benefit calculators — you can use other calculators on the Social Security web site to see how different retirement dates and situations might affect your benefits. For example, the Retirement Age Calculator shows how retiring early reduces your monthly benefit.
Because you desire only a rough estimate, you may use either the total of current balances in IRAs, 401(k)s, mutual funds, and other investments or you may calculate the projected annual income they will produce at your planned retirement age by using the appropriate DCU Retirement Calculator. If you plan to continue making regular payments to any of these accounts, you may select a calculator that allows you to include that factor.
What's the total of these potential sources of income? Note that for the purposes of this rough estimate, you need just the sum of the estimated amounts you've listed.
You now have two figures: 1) how much you will need and 2) how much you potentially and reasonably will have on hand. The difference between the two figures is how much more you will need to save.