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Planning for Retirement

There's plenty of evidence to suggest that it will take big money to live well in retirement: We're living longer, which means our nest egg will have to last longer. Inflation in the cost of health care also is a major consideration.

As we remain active longer during our mature years, we're likely to spend more on travel, hobbies, and educational pursuits. Your planning process should include questions related to those activities. "Understanding Expenditure Patterns in Retirement," from the Center for Retirement Research at Boston College, points out that typical older married adults spend 84% of after-tax household income.

Some experts paint a more positive picture. Ty Bernicke, a financial planner in Eau Claire, Wis., says spending typically drops in the years immediately following retirement and continues to fall after that. The Department of Labor's Consumer Expenditure Survey reveals that retirees age 75 and older typically spend about one-quarter less each year than those ages 65 to 74.

We can live on less in retirement because deductions from our gross income are much smaller. Next payday, take a look at your pay stub. You're likely to find big deductions there, including federal income tax, state income tax, FICA (Social Security) and 401(k) account contributions. These deductions can add up to nearly half your gross pay.

Now consider the assets you'll have to work with in retirement, including:

* Future value of Social Security payments, including cost of living (COLA) increases
* Growth in 401(k) or other employer-sponsored plan portfolio value
* Future value of any defined benefit pensions for you and your spouse
* House and other real-estate assets
* Earnings from part-time, temporary, or seasonal employment
* Life insurance policy payouts and/or cash values

To cope with expenses in retirement, plan ahead. Get a handle on what you can expect to spend on the major categories most retirees encounter: housing, health care, food, transportation, entertainment, and gifts.

Do your best to get out of debt before you retire. Pay off your mortgage, automobile, and credit cards to avoid the enormous financial load that interest payments tack on.

The objective is to balance retirement spending with the assets available to meet them. Be conservative, but don't let the cost of retirement scare you. It's a great reward for your years of work.