Since determining how much money you need to retire is an exercise in foretelling the future, it’s important to understand that coming up with a precise number is close to impossible. Fortunately, a ballpark estimate will be good enough, and that’s very doable.

How do you do that if you’re 30 or 40 years away from retirement? There are retirement calculators on the web that you can use, but if you want to work it out manually, you can follow these five steps.

1. List Your Current Living Expenses

It can be very difficult to project what your living expenses will be by the time you retire. By contrast, it’s very easy to determine your current living expenses. And that’s fine for now, you can make adjustments for your retirement as the next step.

So list your current living expenses, starting with your fixed expenses. This group will include:

• Your monthly house payment
• Payroll taxes
• Retirement contributions
• Health insurance
• Debt payments
• Life insurance premiums
• Other savings plan contributions (savings, investment accounts, etc., payroll deducted or otherwise)

Next, list your variable expenses:

• Groceries
• Utilities
• Internet, cable and phone expenses
• Entertainment
• Vacations and travel
• Repairs and maintenance
• Out-of-pocket medical costs

Once you have all of these numbers listed, total them up. The total will be the starting point to determine how much money you will need to live on when you retire.

2. Adjust Your Living Expenses for Retirement Factors

Once you have your list of current living expenses, it’s time to make adjustments based on the different living conditions that retirement will bring. Some expenses will need to be lowered, while others will need to be increased. Much will depend on what you project your circumstances to be by the time you retire.

Expenses you will need to adjust higher due to retirement, which are primarily your variable living costs:

• Entertainment – retirement will bring more free time, and will likely cause this expense to rise.
• Vacations and travel – travel is a common goal of retirees, and the free time that retirement provides will make it more possible.
• Out-of-pocket medical costs – because retirement also coincides with advancing age, this will be a major variable that will have to be anticipated.

Expenses that will probably be lower in retirement, which are mainly your fixed living costs:

• Your monthly house payment – this should drop if you plan to have your mortgage paid off, or if you plan to downsize to a smaller space, or to a less expensive location.
• Payroll taxes – these will drop when you are no longer working, though you will still likely have income taxes you will have to pay.
• Retirement contributions – when you retire, you shift from saving money to withdrawing it, so this expense should disappear.
• Debt payments – if you plan to be debt-free in retirement, you can deduct these payments.
• Life insurance premiums – this will be lower if you will have a paid-up policy by retirement, or if you decide that you no longer need life insurance.
• Groceries – this expense should drop if you currently have a family, and your kids will be grown and gone by retirement.
• Repairs and maintenance – you might make an adjustment downward if you plan to downsize your home, or to go from two or more vehicles down to just one.

Health insurance could be either higher or lower in retirement. It could be lower if your current plan includes your children. Since they will not likely be on the plan by the time you retire, your premium could be lower.

But there’s a longer list of reasons why it could be higher:

• Early retirement – if you retire before you qualify for Medicare at age 65, you will need a private health insurance plan, and that will almost certainly be more costly than the plan that you have now.
• No more employer subsidy – many employers offer very generous health insurance premium subsidies; the cost of Medicare plus a Medicare supplement could be more expensive than the current contribution you make to your plan.
• Need for better coverage due to age or health – in general, the need for health insurance increases with age; you may need more comprehensive coverage than what you have right now.
• Health insurance premiums are rising faster than the cost of living – you can almost be guaranteed that health insurance premiums will be substantially higher as time goes on.
• Changes in the healthcare/health insurance system – we only recently got done absorbing the massive changes that came about from Obamacare, but there’s no guarantee that there won’t be more costly changes later.

I’m not trying to scare you with regard to health insurance considerations in retirement. But it is a major “X” factor, and one that will require special provision.

Once you have made adjustments for anticipated expense changes in retirement, you should have a monthly figure that will represent a reasonable estimate of your retirement living expenses. Multiply that number by 12 to determine your annual living expenses.

3. Determine Expected Social Security and Pension Income

Next you should determine anticipated retirement income. You can get an estimate of your Social Security benefits by using the Social Security Retirement Estimator. It will give you a monthly amount, which you can multiply by 12 to get the annual amount. You can also register for an online Social Security account where you can track your expected benefits.

If you are covered by a traditional, defined benefit pension plan, check with your human resources department to get an estimated monthly benefit at retirement. Again, multiply that number by 12 to get the annual amount.

4. Calculate the Income You Will Need from Your Investments

By deducting your anticipated annual income from Social Security and/or any pension income from your retirement living expenses, you’ll arrive at the annual amount of income that will need to be provided by your retirement investment portfolio.

For example, let’s say that you will need $50,000 per year in order to live comfortably in retirement. But you anticipate a $20,000 annual Social Security benefit, and a $10,000 per year pension. That means that $20,000 of income ($50,000 – $20,000 – $10,000) must be provided by your retirement portfolio.

Now you can calculate how large your portfolio will need to be in order to produce the investment income that you need.

5. Apply the Safe Withdrawal Rate

The safe withdrawal rate is mostly a convention, that holds that you can withdraw about 4% from a retirement portfolio while preserving its value throughout your retirement years.

It is of course based on the idea of a balanced portfolio, that will include an appropriate mix of both equity investments and fixed income securities. The overall rate of return on the portfolio must exceed 4%, and the the difference is re-invested into the portfolio to protect it from inflation. As an example, if you earn 7% on your portfolio, you withdraw 4% for living expenses, and the remaining 3% stays in the portfolio, to cover a 3% annual inflation rate.

In the example above we’re using the number $20,000 per year that must be supplied by your investment portfolio. You can calculate how much must be in the portfolio by the time you retire by dividing $20,000 by the 4% rate of return.

$20,000 divided by 4%, or .04, equals $500,000

Another way to calculate portfolio size, that may be simpler, is to just multiply the amount of income needed by 25. That will also give you $500,000.

How precise will that number be? Once again, we’re trying to predict the future here, which is always an inexact science. But this does give you a ballpark of how much money you need to retire, and you can use it as a starting point. You will have between now and the time you retire to make any necessary adjustments.