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.

Why an Emergency Fund is Imperative

Having an emergency fund can save you a lot of heart ache! Everyone has their rainy days and we all know that bad luck comes in three's. To prevent an unforeseen event from ruining your week, month or even year; save at least 3-6 months of living expenses in a liquid investment.

These funds are not to be used for holiday savings, birthday savings or any other event that is not considered an "emergency". A good place to save the money would be an online savings account, normally they pay a higher rate of interest than your regular saving account with your bank and the money isn't as easily accessible as you don't have a ATM card and normally a transfer from your saving account to your checking account takes a day or two.

There is a way to make saving effortless....Automate it!

Remembering to save is one of the most difficult things to do as it is usually the last thing on your mind. We normally plan on saving whatever is left in the checking account after all bills, personal allowances and impulse purchases are complete. The only flaw with this plan is: THERE IS NEVER ANYTHING LEFT OVER!

There is a simple solution to this obstacle: Automate your savings plan.

You might have heard of this strategy, it is called paying yourself first. The premise behind it is: you don't worry about what will be left over at the end of the month because your savings allowance has been deducted from your paycheck or checking account before you realize the month is gone.

Paying yourself first is so effortless and simple because it takes all of the planning off of your mind and you don't realize the money is missing.

Use the steps below to automate your savings plan. You will feel truly blessed when an unforeseen event occurs and your savings that you might have forgotten you had is there to save the day!

Step 1: Decide how much you want to save weekly. Ten percent is a good place to start. You can always save more later.

Step 2: Find a reputable online bank that pays a good interest rate on savings account. I use Emigrant Direct(www.emigrantdirect.com) but there are a few other good choices out there. Just remember to check with the Better Business Bureau about each bank's reputation. (www.bbb.com)

Step 3: Set up your online savings account and link it to your regular checking account. To do this log in to your Emigrant Direct account and click on the links tap at the top of the page. Then click "add account," enter your bank account information and follow the instructions.

Step 4: Set your savings account to draft your savings amount from your checking account every payday by clicking on the "transfer money" link and setting your date for the next payday and then every seven days. You may even want to set it for a day before your payday so that it will come out the same day your put your paycheck in. The procedure typically takes until the day after to actually come out of your account