5 Steps to Calculate Your Actual Monthly Retirement Income Needs for Next Year

If you're planning to retire in 2027, there may be one pressing question on your mind: Do I have enough money?

Retiring before you're ready financially could mean struggling to keep up with your costs or having to cut corners constantly. That's not a fun way to live.

Image source: Getty Images.

A better bet is to go into retirement feeling confident that you've worked out a budget your savings and other income streams can handle. Here's how to calculate your monthly income needs and to know whether you've saved enough.

Step 1: Figure out your current monthly spending

If you're retiring next year, you may have a pretty good sense of where you'll live and what it will cost to maintain your lifestyle. A good starting point is to go through your current expenses and see what they amount to. Those should include:

• Housing
• Transportation
• Utilities
• Groceries
• Healthcare
• Discretionary spending

Once you've done that, tack on any additional expenses you expect to incur next year. If you're planning to join a gym because you'll have more time to work out, that's something to account for.

Step 2: Figure out which bills of yours will increase, decrease, or stay the same

Some of your current costs might stay the same in retirement. Others might rise or fall.

If you only have a few more months left on your mortgage, for example, your housing costs should shrink next year. But if you'll be home more often, you may end up with higher utility bills.

Healthcare is another big expense that could change once you retire. If you're used to a generously subsidized workplace plan, moving over to Medicare could mean facing higher out-of-pocket expenses. Or, if you're retiring before you become eligible for Medicare and need to cover the cost of insurance on your own, you may end up spending a lot more on healthcare than you do now, at least temporarily.

Step 3: Adjust for inflation

Once you've figured out your monthly bills and what they're likely to cost you as a retiree as opposed to right now, adjust those figures for inflation. Most recently, inflation rose 3.3% on an annual basis in March. Assuming a 3% inflation rate is a pretty reasonable bet and could help ensure that your numbers are more accurate.

Step 4: Factor in one-time expenses

You may not have to pay for things like home or car repairs every month. But they should still be part of your monthly budget in retirement.

Figure out what amount makes sense to allocate for one-off bills based on the age of your home and car, or based on other factors that apply to you. For example, if you still have term life insurance and pay your premium once a year, that's something you could spread out over the course of 12 months.

Step 5: Make sure you have enough money to cover your needs

Once you've estimated your monthly income needs, it's important to feel confident in your ability to cover them. To do that, figure out what income streams you'll have available in retirement. You might have an IRA, a pension, and Social Security benefits.

If you have guaranteed income streams, those should be pretty easy to account for. Access your most recent earnings statement at SSA.gov to figure out what Social Security will pay you each month. And if you have a pension through work, ask your benefits administrator how to find out what monthly check to expect.

From there, do some math to see if your savings are sufficient. Let's say you expect your monthly bills to total $6,000, you have a $500 monthly pension coming your way, and you expect $2,500 a month from Social Security. That means you'll need $3,000 a month, or $36,000 a year, from your savings.

To see if you have enough, a good rule of thumb is to multiply your annual income needs by 25. So in this case, if you have $900,000 saved or more, you may be in good shape to move forward with your retirement plans.

It's important to have a sense of what it'll cost to maintain your lifestyle in retirement. Take the time to run through an exercise like this if you're planning to exit the workforce in 2027. It could help you approach that next stage of life with more confidence.

The Motley Fool has a disclosure policy.