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Create your retirement roadmap

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|> About Money 101

investing 101

  Create your retirement roadmap
The path to a successful retirement starts with creating an overall plan.

Remember the old Chinese proverb that says a journey of a thousand miles begins with one step? Well, in the case of retirement planning, make that two steps: estimating what your expenses will be once you retire and figuring out how you'll get the income to pay those expenses. Surveys show that less than half of us bother to do this crucial bit of retirement planning. That's unfortunate since it's the only way you can really set a savings goal and monitor your progress toward it.

You can do this number crunching with a hand-held calculator, or a pad and pencil for that matter. But you'll find it much easier and more accurate if you use a retirement-planning software program like Quicken Financial Planner or a retirement calculator on the web such as the one available at Money.com. Whichever method you use, here's a rundown on how the process works.

Start with the expense side. You've probably heard the rule of thumb that you need 70 percent of your pre-retirement income to retire comfortably. Well, don't think of that figure as carved in stone. You could easily get by with less than 70 percent if, say, you've paid off your home mortgage before calling it a career. On the other hand, you may need a lot more if you plan to take plenty of well-deserved expensive cruises and other trips after you retire.

Instead of dealing in generalities, get to specifics. Jot down your current expenses and then cross out items you won't be paying for in retirement, such as commuting to work, paying the kids' tuition and, of course, saving for retirement. Keep in mind that some expenses go up after you retire. You're likely to pay more in medical costs and, unless you plan to spend your senescence in monastic contemplation, you'll probably spend more on travel, leisure, eating out and other entertainment. You can adjust these figures upward for inflation yourself, or, more likely, the software you're using will do that automatically. The idea is to arrive at a realistic estimate -- or range of estimates using different spending figures and inflation forecasts -- that represents the amount of money you'll need to live in the style to which you want to become accustomed once you've retired.

On the income side, first list your future Social Security benefit (estimates available here) and company pension, if any, that you expect to receive. (See your company benefits counselor.) If you're lucky enough to have other assured income, such as payments from a trust or annuity, jot that down too. Considering that today's average Social Security payment is less than $9,600 a year and that corporate pensions are on the wane, chances are your income falls far short of expenses.

Generally, you should have about $15 to $20 in investments to cover each dollar of that shortfall. So if your projected retirement expenses exceed Social Security and pensions by, say, $20,000, you'll need a nest egg of roughly $300,000 to $400,000 in 401(k)s, IRAs and your taxable investment portfolio to bridge the gap.

Most retirement planning software and calculators can help you come up with a more precise estimate of how large a nest egg you must build. They can also tell you, based on the amount you've already saved, your expected investment returns and, when you plan to retire, how much you must sock away each month to reach your goal. Of course, you will have to provide the discipline to stick with the plan, save the money and invest it wisely.

Next: Hatching your nest egg


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