How to estimate your lifetime retirement paycheck

(MoneyWatch) Welcome back to the third post this week in my series, 16 Weeks to Plan Your Retirement. This post and my posts next week will help you estimate all your sources of retirement income. It builds on what we've learned in the previous weeks of this series on how to generate retirement income that lasts the rest of your life, no matter how long you live or what happens in the economy.

Because there's no one magic bullet that will do it all for you, you'll want to piece together different sources of retirement income to generate the money you need. This post helps you estimate the amount of retirement income your IRAs, 401(k) and other retirement savings vehicles will generate for you. To do this, you'll first have to determine the total amount of retirement savings from which you'll be generating income.

Start with the inventory of your retirement savings from all sources (as described in week five of this series). Then you'll need to make some adjustments:

  • If you anticipate that you'll sell your house and realize a profit, and you want to use these gains to generate retirement income, add to your retirement savings the gain you expect to realize, after considering taxes and sales expenses.
  • Subtract from your retirement savings any investment accounts you'll dedicate to paying for long-term care expenses (as described in week 14 of this series).
  • If you're delaying taking Social Security to optimize your lifetime income, as described in my previous post, subtract from your retirement savings the estimated total amount you need to make up for any Social Security income that you might be deferring.
  • Subtract any amounts you plan to set aside for unforeseen emergencies.
  • If you expect a lump-sum payment from a pension plan, add this amount to your retirement savings (That said, I'd rather not see you take a lump sum, as you'll see in my post next week.)
  • Add any amounts you expect to save between now and your desired retirement age.
  • Add any expected growth in your investments you expect between now and your desired retirement age. If your desired retirement age is less than five years from now, I prefer to assume you won't realize any future growth. This is just to be safe, given the current low interest rates and the volatility in stock investments. If you want to assume you'll have future investment earnings, however, make sure the growth rate you use is realistic given the types of investments you use. And use more than one assumed rate of return -- a pessimistic rate, an expected rate and an optimistic rate -- to see the range of possibilities.

Now you've got the total amount of retirement savings you'll use to generate the retirement income you'll need.

Next, you'll need to select one of three methods -- or a combination of the methods -- to generate lifetime income from retirement savings. (I described these three methods in week nine.) Once you've done this, estimate how much income you'll receive under the method or methods that makes sense for you. The amount of retirement income your savings can generate will vary widely, depending on the method you use.

If you're working on this step, let me point out a common flaw of most online retirement planning calculators: They won't let you specify the method you want to use to generate retirement income from retirement savings. In fact, many calculators choose the method for you or assume you'll draw as much as needed to meet your living expenses.

Here's one way around this flaw: Many calculators let you input "other" sources of retirement income. In this case, you can estimate the amount of income you expect to receive from your retirement savings, using your method for generating retirement income, and then input this amount into the "other" category. This enables you to trick the calculator to use your method of generating retirement income. If you do this, make sure you don't tell the calculator about the amount of retirement savings that generates your income; otherwise you'll double count the amount of income generated from your retirement savings.

Once you've run the numbers, if you find you don't generate the amount of income you need, you might want to revisit your method of choice for generating retirement income. Then do the math again.

To learn much more about the different methods you can use to generate retirement income from your savings and how to estimate how much income you could receive, read my latest book, "Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck."

My first post next week will help you estimate how much you can expect to get from your traditional pension. You can skip this step if you know you haven't earned a pension benefit from your employer. Then stay tuned for subsequent posts next week that will help you put together all your sources of retirement income, see if they cover your retirement living expenses and learn how to make adjustments if the numbers don't work.