Let's imagine you're wasting time on a Saturday afternoon and you stumble upon a neighborhood yard sale. Digging through your neighbors old bowling trophies and workout DVDs, you find the answer to your prayers - a crystal ball. Now, do you tell your neighbor that they misplaced it? Unless you were born into being "North Dakota" nice and give it back by-gully, you probably hold onto your new and valuable treasure. Now what do you end up doing with the find? What would you ask it? If you are in that age range where retirement is sounding pretty good, you would probably want to know: "Can I afford to retire?" or "How much money do I need to Retire?"

This is a very important and life considering question to think about and unfortunately; the crystal ball may not be there to answer your every pray. However, we find that there are many ways to figure how much money you need in retirement, just like there are different methods to make money in the stock market. But here’s the best method we’ve seen, which requires a bit of math but nothing too challenging.

1.  Arguably the best, but least popular way we gathered to answer this question is... You guessed it, create a budget. Budgeting can help you figure out approximately how much you’ll need to spend, on either an annually or yearly basis. If you do it by the month, don’t forget to add in expenses that only come once or twice a year, such as insurance bills, tax bills and vacation bills. That can be important.
 

2.  Next, estimate how much money you believe you will spend in retirement. It's always hard to predict where you will be financially or what type of health condition you'll be in 10, 15, 25 years down the road. That's why we find it so important to know how much money you’re currently earning as a provided baseline number and then scale back accordingly once retirement sets in. Now, how does one effectively know how to scale back? We suggest that you:

• Deduct the amount you’ve been saving every month. Obviously, after you retire, you won’t be saving for retirement anymore.
• Deduct what you’ve been paying in payroll tax since you won’t have a paycheck anymore. You might also estimate a new income tax level, which likely is less than what you’re paying now.
• Deduct how much you’ll save in taxes, utilities and other expenses if you’re moving to a less-costly housing arrangement, either by downsizing, moving to a cheaper area or both. 

3. Then, factor in your changes in lifestyle. For people who intend to travel to Timbuktu or Kalamazoo, then yes - those expenses might actually increase. But for most people, the expenses will go down. You won’t have commuting expenses, your clothing budget may be less and your grocery bill may even go down since you’ll have more time to shop for sales.

4. Next, factor in any changes in what you’ll spend on your kids, family members, or loved ones. This is a number that varies widely depending on the situation – and it may change over time – but you still need to take it into account.  

All these adjustments should bring down your cost of living significantly. We've seen this change the cost of living from anywhere to 30-50%!  You have a lot of control over how you’re going to live your new, retired life. Therefore you have a lot of control over your expenses.

5. Finally, factor in an adjustment for health care. Believe it or not, those who’ve been paying for their own individual health insurance could actually see their medical insurance expense go down when they join Medicare. But most people will likely spend more on health related services as they get older. So please, check your health insurance options and also do a realistic evaluation of your own health care services and genetic/family history.

Now after you've done all the steps and leg work - we'll give you the answer. Financial experts and from our past experience from helping those afford retirement - we figure that the average person, will need about 75 percent to 80 percent of their pre-retirement income to sustain their standard of living after they retire. Of course, that will change accordingly based on your current earnings, your lifestyle expenses, your retirement lifestyle expenses, your health expenses, and your housing expenses. But, this is just a rule of thumb: do your research, and then budget the math to see how much retirement savings you need. Here’s the math:

Add up the retirement income you’ll receive on a regular basis – again either monthly or annually – from Social Security, a pension, rents or royalties and any other recurring income.

Subtract your income from your budgeted expenses. If your result is zero or negative … then go ahead and order dessert for supper because you will have more than enough income! However, there's always the flip side to this dilemma. Most of us will have more expenses than income, so we’ll end up with a positive number that represents the income gap we need to close with our savings.

In this example, let's say this gap is an even $3,000 from your retirement income from your monthly expenses. That could mean that this monthly shortfall could be averaging about $36,000 a year. Now multiply the number of your yearly gap by 25 (the average number of years a person will be retired citizen) - what would you find? $900,000 is the amount that you would need to place into your individual retirement account, 401(k) or savings vehicle to close the gap of $3,000 a month. 

Like all the other numbers you project into retirement, these are just pure estimates and averages, so we recommend you customize this plan to finance your own retirement lifestyle. And if you get stuck along the way or you can't finagle the crystal ball away from your neighbor, always consult your financial planner for unbiased, step-by-step instructions.