Because of the compounding effect of investment returns:

• A small increase in the amount you are currently saving toward retirement can made a big impact on your retirement "nest egg".

• The more time you have to save and invest before you retire, the bigger the impact on your nest egg.

Planning for retirement involves five steps:

1. Estimate Retirement Living Expenses

Conventional wisdom would have you believe that post-retirement income needs are 60% to 80% of your pre-retirement income. However, several important factors are sometimes overlooked:

• Inflation - You may be able to live on 80% of your pre-retirement income during the year immediately after you retire. But, what about five years to ten years after you retire? You need to account for the erosion of wealth caused by inflation in your year-by-year expense estimates. Even at today's relatively low inflation rate of 3% per year, if your needs remain static, the cost of goods and services will rise 56% over a fifteen-year period. So, your income will also need to grow by about 56% during that fifteen-year period.
• Healthcare - Your company may provide for 100% of your medical care expenses while you are working. But, what about during retirement? In response to rapidly increasing heath-care costs, many companies have reduced post-retirement medical benefit. Additionally, the benefits paid by the government-sponsored healthcare program, Medicare, may be substantially reduced. As you estimate your retirement expenses, you may want to increase the amount budgeted for medical expenses.
• Unexpected contingencies - Do you have adequate reserves to cover a long-term illness requiring a stay in an extended-care facility? Do you have children or other dependents that may require financial assistance during your retirement?
• Longevity - Do you have a family genetic disposition toward longevity? If your parents and grandparents enjoy good health and a long life, you will likely need to draw down your retirement assets more slowly so you won't outlive your resources.

2. List Sources of Retirement Income

Given the career mobility of today's work force, you will most likely receive retirement income from a variety of sources:

• For defined benefit pension plans, when do your benefits begin? Is early retirement subsidized by the employer?
• If you are a participant in a defined benefit plan, can you elect a lump-sum payment? If so, under what terms can you make this election?
• What is your confidence in the Social Security retirement system?

3. Evaluate Your Risk-and-Return Profile

In planning how to invest for your retirement, how much risk are you comfortable with? Following the tenets of Modern Portfolio Theory, there is a tradeoff between risk and investment return - the greater the potential return, the higher the risk that one must assume. Understandably, most investors are reluctant to assume a high degree of risk with their retirement funds. However, there is also risk in investing too "conservatively".

4. Define Your Asset Allocation

Based on your risk-and-return profile, you need to select an appropriate stock-bond-cash allocation. The essential determinant is the time period until you expect to retire; that is, until you will need the funds to generate retirement income. The longer the time until you need the funds, the more aggressive your equity allocation should be - that is, the larger the percentage you should allocate to stocks. Be careful at this step. You should be aware that the average life expectancy of a married couple, both age 65, is more than 25 years.

5. Establish an Appropriate Contribution Level

• At this point, you have all the pieces needed to determine the future contributions necessary to fill the "gap" between your current resources and your expected retirement income needs. But, there are other issues you need to keep in mind:
• If you are now in your 40s (or older), in order to have assets sufficient for retirement, you may need to supplement your tax- deductible 401(k) retirement plan savings with after-tax savings.

In determining your future contributions, you may want to evaluate several scenarios. One scenario might be a constant-dollar contribution from now until retirement; a second scenario might be an increasing contribution reflecting your increased ability to save over time as your salary grows. Then again, during children's college years, there may be periods when you diminish your level of contribution. You should try to reflect your specific family situation in planning your contribution pattern. There are many issues that typical retirement planning guides do not address. You need to be aware of YOUR special circumstances will impact this retirement planning process.