The process of planning for retirement is more complex than ever before. Since pensions have all but gone extinct, it can be a challenge to know how much income you’ll have as a retiree. It’s easy to get distracted by questions like “how much should I save?” and focus your attention on some arbitrary number. A better alternative is to start your retirement planning process by answering the question, “how much does my lifestyle cost”?

There’s no simple way to determine that — since it may be a moving target — but here are four steps you can take to assess your spending habits so you can better prepare for the future.

Step 1 — Determine Take-Home Pay. If you work for a corporation, review last year’s W-2, focusing specifically on what your after-tax, after-deductions take-home pay was. If you’re a small business owner or entrepreneur, this step can be challenging; you’ll probably need to estimate based on your tax bracket.

Step 2 — Identify Baseline Spending. Once you’ve determined your monthly take-home pay, let’s assume you spend all that income to create a “lifestyle baseline.” Why? If you’re like most people, you don’t know how much you spend — and even if your typical spending pattern is less than what you take home, you need to account for one-off expenses like a car, major home renovations or family vacations.

Here’s an example:

James and Jenna are 51. James has a corporate sales job for a software company and Jenna runs a side business out of their Irvine home. Together, they make $400k a year. After maxing out both of their 401(k)s at $19,500 each, and paying $8k for health insurance at James’ company, let’s assume they pay taxes on about $350k of income. Using an effective tax bracket of approximately 30 percent, their take-home pay is $245k a year, or $20k a month. James and Jenna have automatic payments going toward a mortgage and college fund, so they know they spend about 75 percent of their take-home pay on themselves, which is $15k per month.

Step 3 — Consider Future Income Sources. Once you have a grasp on your spending, you need to consider your future income sources. We’ll assume Social Security is still solvent. Continuing with our example couple, they’ll receive a combined $5k per month before taxes or Medicare. They also have a rental property that supplies $1k of cash flow monthly after expenses, so they can safely assume they’ll have around $6k in income per month.

Step 4 — Determine Your Income Gap. Your income gap is the difference between what’s coming in and what’s going out. For James and Jenna, the gap that would need to be covered by their savings and investments is: $15k – $6k = $9k per month. Once you determine your gap, run a financial planning simulation to see how much you’d need to have saved to fill it. Of course, life can change and unexpected expenses are nearly inevitable — you may spend more in early retirement and less as you get older. In this hypothetical situation, James and Jenna should assume they’d need from $2.7 to $3.5 million from savings and investments to support themselves for 30+ years.

This process can be complex, but you don’t have to go it alone. Ask your financial advisor to go through it with you — or contact me for assistance.