Many of us have dreams of retiring at some point and having the time to do what we want to do, away from the rat race. However, the dream of retirement isn’t free. You do need money to make it work. But how do you know how much you need? One very common figure for retirement is to have $1 million saved up in some sort of account by the time retirement comes. This amount, many figure, is enough to live on for a couple of decades as long judicious withdrawals are made — and as long as a major economic event doesn’t destroy returns.

However, I’m not sure that having a target amount, whether it’s $1 million or $5 million, is the way to go when it comes to figuring out how much you need for retirement. I’m more interested in the idea of figuring out your monthly costs, and then working to build income streams based around that. It seems to me that putting income in place now to cover your desired lifestyle later is more important than trying to get your nest egg to hit a certain figure. And it could mean an early retirement.

How Much Income Do You Need During Retirement?

You may not be working a 9 to 5 job during retirement, but you will still need some sort of income. In many standard retirement scenarios, this income is drawn from a retirement account, along with Social Security benefits from the government. It is a good idea to start thinking, now, about how much you might need during retirement.

First of all, it is a good idea to consider your expenses now. How much are you paying for the necessities of life, as well as for the things you enjoy doing? If you plan to maintain the same lifestyle, chances are that you will need the same income — perhaps a little more if you consider the effects of inflation. The good news, though, is that you can also factor in the possibility that some of your expenses will decrease as time progresses. If you plan to down size your house, you can save money on those costs. Pay off debt, including your mortgage, and you will no longer have those drains on your income. Additionally, one can hope that any children you have will be grown and no longer requiring substantial financial support.

Do your best to estimate various monthly costs of a retirement lifestyle, and figure out a plan for cultivating income streams that can help you establish the income that you will need. This does include contributing to a tax advantaged retirement account, of course. These contributions are important, and they can be helpful down the road. But they shouldn’t be the only thing you rely on for retirement.

Building Income Diversity

As many people discovered with the financial crisis a couple of years ago, relying too much on retirement account can upset even the most carefully laid retirement plans. This is why it is important to make income diversity a part of your retirement income planning process. You can start now to cultivate different types of income from businesses, web sites, royalties, dividend paying investments, and other sources. You can even plan to work part-time in retirement, or get a low-paying job doing something you enjoy.

In the end, how much you need for retirement is a very personal calculation, dependent upon your expected expenses, your desired lifestyle, and what you are doing now to prepare for the future. If you focus on developing multiple income streams — some of them passive — you might find that you can have a comfortable retirement, even if the $1 million mark in your retirement account eludes you.

Photo: madmaven