(MONEY Magazine) – You know you must save regularly and invest wisely to have enough money for a secure and worry-free retirement. But how much is enough? Sure, you'll probably have a pension and Social Security, but those checks will most likely replace less than half of your pre-retirement income. And for investments to make up the difference -- say, another $20,000 a year, increased annually for inflation -- you'd need to retire with a $310,000 portfolio earning 8% before taxes, which is the historic average for a conservative mix of stocks, bonds and cash. Instead of panicking about falling short or having to catch up, take time now to think about how your life will change when you leave work and then estimate the cost of that lifestyle. The traditional rule of thumb that retirees need 80% of pre-retirement income may not hold true for you. You may consider it a hardship to have to make do with less just when you have time to enjoy the fruits of years of work and savings. " For many, true financial independence is maintaining your lifestyle whether you work or not," says Bloomington, Minn. financial planner Robert Steffen. On the other hand, frugal people may find they need no more than 50% of their pre-retirement income. Health care aside, Americans over 65 spend 25% to 40% less than younger people do on food, clothing, housing, transportation and other everyday expenses, according to the Bureau of Labor Statistics. Whether to plan for a retirement that costs 50% or 120% of your pre- retirement income depends on how you hope to live after you stop working. Do you envision a retirement of travel, two homes and a country club membership? Or quieter years making do with one car and fewer dinners out? Moreover, with retirement possibly lasting as long as 30 years, don't forget that your living costs will likely diminish as you age. "There are two phases of retirement -- the active early years and the more sedentary older years," says financial planner John Cammack of T. Rowe Price in Baltimore. Expenses tend to be highest for young retirees who travel extensively. Older retirees typically spend less on such discretionary items as well as on necessities such as food and housing, but probably more on health care. To find out the dollars and cents of all this, start with the worksheet on page 25. It will help you calculate how your retirement spending habits may change in both early (ages 60 to 75) and late (over 75) retirement. Then let the worksheet on page 26 guide you to an annual savings goal based on your anticipated retirement lifestyle, your current savings and your expected pension and Social Security benefit. (Alternatively, you can make the estimates with a personal computer, using one of the top five software packages described on page 29.) The rest of this story will help you fill out the worksheets, starting with the one on lifestyle costs on page 25.

Housing (line 1) will continue to be your biggest expense, even if you don't have a mortgage. "People overestimate the savings they'll get by having their mortgage paid off," says Glenn Pape of the Albany, N.Y. financial planning firm Ayco. "They also minimize nonrecurring expenses like repairs." You should figure that property taxes, homeowners insurance, utilities and upkeep will cost you no less than they do now, unless you move to a smaller house or to a lower-cost area. (See "MONEY's Best Places" on page 69 for housing costs in 20 popular communities.) Your food costs (line 2) may decline 25% or so in retirement if you eat out less (obviously you won't continue to buy lunch at work every day). Transportation costs (line 3) will drop, since you will no longer incur commuting expenses. And you may find that you don't need to replace a car so often or even keep two, especially later on.

Your biggest savings on taxes (line 4), if you don't work in retirement, will be the 7.65% Social Security and Medicare tax on wages. In addition, some states exempt some income from Social Security benefits and pensions from taxes. But don't look for many other breaks. Under the new federal tax law, for example, as much as 85% of your Social Security benefits may be taxable, depending on your overall income. Trying to predict medical expenses (line 5) is tough, since you don't know what health problems you may face or the outcome of the health reform debate. Nonetheless, for purposes of the worksheet, assume that since you'll have to shoulder a bigger share of health-care costs, those expenses could be 25% to 30% higher. In addition, early retirees may face higher medical costs until they qualify for Medicare at 65 if they have to buy their own insurance, which can cost a couple $6,000 a year. Also, figure on your health costs staying high after 65, because of higher out-of-pocket medical expenses and insurance premiums; for example, a supplemental Medicare policy could run as much as $3,500 a year. And don't forget routine dental costs, which may mount with age and are unlikely to be covered by insurance. Unless your job never required pricey suits or dresses, you can expect to shave 30% to 40% off clothing costs (line 6). How much travel and recreation costs (lines 7 and 8) may change depends on your tastes. If retirement means that you'll be going on long trips, budget for them, since travel is often retirees' single biggest new expense. Chances are -- you hope -- you will have finished paying for your children's education by the time you retire. However, think about whether you want to take courses yourself (line 9). You may also want to help grown children buy a home or pay for their children's schooling. Members of the so-called sandwich generation may have to budget money for the care of their aging parents (line 10). As for loan payments (line 11), planners suggest that you reduce credit- card and other debt while you are still working. Life insurance costs (line 12) usually go down or, in the case of disability insurance, disappear in retirement, since you typically will no longer have earnings from work to protect. Your income from investments, including those in retirement savings plans, doesn't need to be safeguarded by life insurance. Nor does your pension, since federal law requires that a surviving spouse be paid a reduced benefit -- unless he or she has formally waived it. On the other hand, you may need life insurance to provide liquidity in your estate or supplement a small pension for a surviving spouse. Don't expect to stop saving (line 13), because that's one of the only ways to counteract inflation. Plan to save about 5% to 10% of your income annually in the first years after you stop working, advises Denver financial planner Eileen Sharkey. Moreover, in your early retirement years, you might take a part-time job to supplement your income from pensions and taxable investments. That way your tax-deferred accounts can keep on growing to cover unexpected costs and provide income in late retirement when you stop working altogether. Finally, you should consider cutting back on donations to charity (line 14) and volunteering instead. You'll save money and make productive use of your increased free time as well. After you've estimated the cost of your life in retirement, the table on page 26 will help you to determine how much you must set aside every year until you stop working. As the worksheet's line-by-line instructions specify, you'll need estimates of your future Social Security benefit and your company pension. If you're close to retirement, your company benefits department may be willing to project a pension based on your planned retirement age, which will be more accurate than one based on your current years of service. You'll most likely find that your pension and Social Security won't equal your expected retirement living costs. For example, if you retire after this year and are earning $60,600, the maximum wage covered by Social Security in 1994, your government benefit will replace about 27% of that amount. If you had earned $85,000, that Social Security benefit would make up only about 19%. (Early retirees now collect 80% of the full benefit if they start receiving checks at age 62; that percentage will decline to 75% in 2005 and 70% in 2022 as the age for full benefits rises.) Don't count on your pension to pick up what Social Security doesn't cover. What you collect will be based on years of service and your salary over the ) past three to five years on the job. Traditional defined-benefit pensions, which cover 40% of workers, typically replace about 30% of pre-retirement salary and rarely increase with inflation, unless you worked for the government. Once you identify the gap between your projected pension and Social Security benefits and your retirement cost of living, you can determine the amount of money you must save to make up the shortfall. That ought to provide all the incentive you need for a serious study of "The Only Way to Invest for Your Future," beginning on page 34.