Step #4: Saving for Retirement: Building a Nest Egg

Most people panic in retirement planning because they think they have to replace their entire salary. You don't. You have to replace your current cash flow, and that's a big difference.

Let's assume that you earn $60,000 a year. You won't need $60,000 from your investments, because you probably didn't live off $60,000. You can adjust your needs downward for:

•Taxes. You paid Social Security and Medicare taxes while you were working, but you won't when you retire. So you can get along with 7.65% less than $60,000, or about $55,000, says Ray Ferrara, a financial planner in Clearwater, Fla. If you're self-employed, the tax was 15.3%.

•Savings. If you put a percentage of your salary into a 401(k) savings plan at work, you won't be able to any more. If you contributed $4,200 to your 401(k) annually, 7% of your salary, that's another big expense you won't have. Assuming you did just fine while you were paying Social Security taxes and saving for retirement, you can adjust your income goal down to $51,000.

•Social Security and pensions. You may not believe you will get Social Security, but you probably will get some benefit. Social Security's online Quick Calculator (www.socialsecurity.gov) says a 50-year-old earning $60,000 today would get about $1,214 a month in benefits if she retired at 62. That's $14,568 a year in benefits. So you'll really only need to replace about $36,500 in income. Any additional pension you get would reduce that even more.

Before you get too giddy, remember that you'll have to buy health insurance if you retire before age 65, when Medicare kicks in. A 62-year-old male or female in Washington, D.C., would have to pay about $640 a month, or $7,680 a year, for health insurance, Ferrara says. And that's a policy with a $2,500 deductible and a 20% co-pay until you hit $3,500 in deductibles and co-payments.

Assuming our person with $60,000 income gets Social Security and pays for insurance, she will need to replace about $44,200 a year in income at retirement.

It's the big things

What can you do to reduce that more?

•Pay off your mortgage by retirement. Most people pay a quarter or more of their income to their mortgage. If your mortgage is $12,000 a year, that's $12,000 a year that won't have to come from savings.

•Think about moving. If you've made scads of money on your house, consider cashing out — by moving somewhere more affordable. Granted, it's possible only if you would like living elsewhere, but it may be one way to cut expenses.

•Retire later. If you retire after 65, you won't have to buy private insurance until Medicare kicks in. (Medigap insurance, which pays what Medicare doesn't, is another story.) And you'll collect more in Social Security benefits.

•Kick the new car habit. Car payments can eat up $300 or more a month. Keeping your car an extra few years can reduce your expenses in retirement.

•Don't lend money you couldn't give away. THIS IS MY MOTTO! I HONESTLY DO LIVE BY THIS! All too often, loans to friends or children become gifts. That's fine, if you can afford it. If you can't, then be leery of lending it. "One of the best retirement investments is making sure your children are financially independent," Shine says.


START SAVING FOR RETIREMENT SOON, SAVING A LITTLE NOW CAN LESSEN THE BURDEN LATER! THE MAGIC OF COMPOUND INTEREST CAN TAKE YOUR NEST EGG FROM DRAB TO FAB!

Every little bit helps, whether you save $5, $50 or $500 you must start somewhere.