Introduction

Welcome to Retirement Planner.

Retirement Planner is designed to assist you in predicting your financial future. You will enter the values for your income, expenses, assets and investments and enter estimates for inflation, interest and tax rates. The program takes this data and estimates your future net worth.

You can use those predictions to decide if you are going to be able to achieve your goals - retirement, college for your children or grandchildren, quitting your job and stepping down to a simpler lifestyle. If your goals are not achievable you can adjust your expenses, investments, or even your income to determine what changes you need to make.

It is important that you understand that Retirement Planner is not an investment or portfolio manager. It will not help you decide how much to invest in bonds vs stocks. It will not help calculate the return on a loaded mutual fund or help you compare it to an unloaded fund. It is a tool designed to help you decide how much to invest.

If you are running the evaluation version or the program, thank you for your interest. If the program serves your needs you can register it at http://RiverCitySoftware.biz/Register.html.

If you have purchased the program I would like to thank you for your support.

I have worked hard to make Retirement Planner a premier tool. If you disagree (registered or unregistered) please send me an e-mail at support@RiverCitySoftware.biz, I am always looking for suggestions for improvement or even simple focused criticism. I need to know what problems people encounter when using the program before I can fix them.

Software License

TODO: Copy this section from the program

Legal Disclaimer

The action of forecasting your financial future is, due to the complexity of the economic world and the difficulty of accurately understanding or forecasting all the relevant factors, uncertain and error prone.

As you work with the program you will find yourself making a lot of assumptions and predictions. You will need to select a percentage for the return on investments and the average inflation rate. You need to make estimates about both your current and future financial situation. These estimates cover income, expenses and investments that you control and other items which you can't control but which have a direct impact on your finances such as Social Security, Pension plans, etc.

The amount of money you actually invest will almost certainly differ from your estimates. Businesses you invest in may generate an unexpected windfall or, conversely, file for bankruptcy. At the same time, some expected events do not happen and other unexpected events do happen.

By using this program you acknowledge that you have considered these issues and do not hold River City Software, LLC, it's owners or it's employees responsible for the financial performance of your investments.

Retirement Planner General Information

This chapter contains a section describing each screen in "Retirement Planner. If you have a question about a value or a feature on a screen you can read about it here.

Registering the Program

Purchasing Retirement Planner is done by contacting River City Software, LLC http://RiverCitySoftware.biz/register.html and providing payment information. In return you will receive an activation key that will unlock the full functionality of Retirement Planner.

You can also purchase the current version of the program on CD or floppy disk. Visit the web site for details.

River City Software, LLC can not accept funds in foreign currency. Overseas buyers need to pay by credit card or send a check drawn against a US bank in US currency. We apologize for the inconvenience this causes overseas users.

You can contact River City Software, LLC and provide registration information in one of three ways:

1: Print and fill out the registration form in the file Register.txt. Mail the completed form to:

River City Software, LLC
P.O. Box 549
Independence, OR 97351-0549

Using this method you can pay with either a personal check, Master Card or Visa.

2: Register at the River City Software, LLC web site at http://RiverCitySoftware.biz/Register.html. You will be asked to fill out the registration form, and will need to provide your credit card number. After successfully registering you will receive an activation key, that will unlock the full functionality of the Retirement Planner.

3: Call River City Software, LLC at 503-838-2818 You will be asked to provide a credit card number and will receive an activation key.

All orders received by mail and all requests for a CD are processed within one business day.

Program Overview

The purpose of Retirement Planner is to assist you in understanding the financial resources you have available and to help you gain an idea of what expenses you will face when you retire. Once you understand where you are and where you are going you can develop a plan for the journey. Welcome again to Retirement Planner, lets get started.

You navigate in Retirement Planner with the toolbar buttons at the top of the screen. The Personal Data, Investment Data, Asset Worksheet, Income Worksheet and Expense Worksheet buttons take you directly to the appropriate screen so you can review or enter data. The Net Worth Timeline and Income/Expense Timeline screens present the values you have entered in graphical format. This graph presentation is easier and more intuitive than rows and columns of numbers.

Don't be intimidated by the number of entries you need to make. Each value by itself is simple to understand and available to you from your checkbook, investment statements, paycheck stubs or tax forms.

The first time you run Retirement Planner the program automatically runs the Personal Data Wizard. This wizard will assist you in gathering the information needed for the Personal Data and Investment Data screens.

The data entry process will flow easily if you take each screen in order, enter the data carefuly and review your entries for errors before moving on to the next screen.

If you gather your materials before you start you can enter the data in a half-hour or so. Once you have entered the raw data into the program you can examine the results and see where you are.

Start Date and End Date

The entry forms in the Asset, Income and Expense worksheets have a Start Date and an End Date for each item. You can use these dates to show when the associated item starts or stops. For example, if you are a homeowner with a mortgage you will make an entry on the Expense Worksheet under the Household tab for the House Payment. The entry will include the amount of the monthly payment and the date of the last payment. By giving the End Date for the payment you are telling the program that the expense will go away after that date. When the program accumulates a total for Expenses it will include the house payment up to (and including) that date and leave it out afterwards.

IMPORTANT You must enter an End Date for your job (The Wages, Tips and Salary entry under the Income Worksheet tab.) Retirement Planner does not assume you quit work on the date of your retirement. If you don't give an end date the program will assume you continue to work and continue to include your wages in your income. This would result in a significant error. The Retirement Date under the Personal Data shows when you start to receive Social Security benefits. It does not specify when you quit your main job.

Examples of items with start/stop dates are:
Item Monthly Amount Start Date End Date
Wages, Tips and Salary $3,200   6/30/2010
Part Time Job after Retirement $1,000 7/1/2010 6/30/2019
House Payment $1,273   6/15/2019
College Room/Board/Tuition/Books $1,000 9/1/2005 6/1/2009
Day Care for Ted $290   9/1/2005
Home Nursing Care for Dad $1,500   6/1/2009

Use Estimates for Quick Answers

If you have a good understanding of your current financial situation you can click on one (or all) of the boxes in the Quick and Easy Solution Estimate on the Personal Data screen.

When you enable these estimates the program ignores the values you have entered in the associated screen(s) and uses the value you provide.

Use Estimated Investments and Assets When you enable this estimate the values on Investment Data and Asset Worksheet screens are ignored.

This estimate should include the total value of all your investments and assets. This should include your 401(k), IRA, cash value pension, stocks, bonds, CDs, savings, home market value, etc. It should not include the value of a pension plan or annuity that will be paid out in monthly installments, those will be included in your income.

Using this estimate is less accurate because it treats your pre-tax and regular investments the same. In real life there is a significant difference in how these items are taxed.

Use Estimated Monthly Income When you enable this estimate the values on the Income Worksheet screen are ignored.

When enabled, this value is used as your earned income. The program assumes that this income stops when you begin to receive Social Security. If you are already retired you should leave the Estimated Monthly Income box unchecked.

If you are married, Retirement Planner assumes the income is evenly divided between you and your spouse. The half that is assigned to you is lost on your retirement date and the other half is lost on your spouse's retirement date. If you are single Retirement Planner assigns the entire income to you and you lose the entire amount on your retirement date.

Using this estimate will be less accurate when you have an income that starts or stops.

Use Estimated Monthly Income When you enable this option the values on the Expense Worksheet screen is ignored.

This estimate should include all your monthly expenses. A reasonable way to estimate it is to take your after tax income and subtract any long term investments you make. Divide by 12 to get the monthly figure.

This value will not be accurate unless your living expenses for the rest of your life are nearly constant. For most of us, this will not be the case. Our cost of living will decline as we get older and as we become less active. As we become elderly and frail our medical and living expenses will begin to increase.

Entering Data

When you first start using Retirement Planner the chore of entering data can be intimidating. Don't let it get to you. If you gather your information before you begin and start on the Personal Data page and work through each page in a methodical manner you should be able to work through the data entry chore in about 45 minutes.

Personal Data Wizard

The first time you run Retirement Planner it launches a Personal Data Wizard to assist you in gathering some of the information it needs. The wizard helps organize the data gathering effort. You can, if you wish, press Cancel to exit the wizard and enter the information directly in the Personal Data and Investment Data screens.

Information about the data values requested by the wizard can be found in the Personal Data and Investment Data sections of this manual.

Saving and Loading Files

When Retirement Planner starts it reads a file named Retirement.rpdat. This file holds the information you have entered into the program.

If you desire, you can save data to the file of your choice. In the File menu, select Save Data As... You will see the Windows Dialog for saving a file. After you enter a name and click OK the data will be written to the file you have specified. If you do not enter a file extension the program will use .rpdat. If you double click on a .rpdat file in the Windows Explorer program your computer will automatically start Retirement Planner using the file you clicked on instead of Retirement.rpdat.

You can also load the Retirement Planner file of your choice by going to the File menu and selecting Load File... You will see the standard Windows dialog for selecting a file, after you have selected a file and clicked the OK button the data will be loaded into the program and you can view and edit it.

Note: Saving and loading files other than Retirement.rpdat is only available to registered users.

Retirement Planner Program Details

Retirement Planner has a series of 5 data collection screens along with 2 screens to present the results. This part of the manual has a section discussing each screen and presents the mechanics of the program along with a description of each data field on each screen.

See What To Do With The Answers for a discussion focused on interpreting the results.

Personal Data
A snapshot of the Personal Data screen

It's always best to start easy and the Personal Data page does that. Work through the page and fill in the information you know. There are a couple of numbers on this page that you probably don't know. If you find yourself stumped, look up the topic in this manual. It gives estimates for the things you may not know. More important, though, it gives some tips on how to research available information so you can develop a more accurate answer.

Retiree Information

Name Name of the Retiree
Birthdate

The program uses the Retiree's birth date to calculate his/her age which is needed to calculate age specific items such as social security benefits

Retirement Date

The date when you expect to start receiving Social Security Benefits.

Social Security Amount

The amount of your expected Social Security Benefit. For the most accurate possible estimate go to the Social Security Website at 'http://www.ssa.gov'

Spouse Information

Name Name of the Spouse
Birthdate The program uses the Spouse's birth date to calculate his/her age which is needed to calculate age specific items such as social security benefits
Retirement Date The date when your Spouse expects to start receiving Social Security Benefits.
Social Security Amount The amount of your Spouse's expected Social Security Benefit. For the most accurate possible estimate go to the Social Security Website at 'http://www.ssa.gov'

Miscellaneous Personal Data

Retiree is married Social Security Benefits are dependent on whether you are married or single. In addition, the Estimated Income values (see below) are assigned 100% to a single retiree but are divided 50/50 between a married couple.
Years to calculate projection How many years to include in the projections graphs? For retirees this relates to how long they expect to live. For other goal planning (saving for college, etc.) this is the number of years until the goal is achieved. The Planning for your Retirement section contains a more complete discussion of the issues involved.
Inflation Rate Inflation and Interest (investment return) have a very strong influence on the calculations results. Estimating the Inflation Rate too low has the effect of making future expenses artificially low. The result is that even modest investment returns outperform inflation and generate excessively optimistic results. Estimate Inflation Rate too high and inflation consumes your investments, leaving you broke.

Don't let the current low inflation make you too optimistic, if you pick anything below 4.0% you should have a good reason.

Use 4.5% if you don't know what to put down. There is a more complete discussion of inflation in the Planning for your Retirement section.

Investment Return Investment Return and Inflation each have a strong influence on the calculations (Estimate Investment Return too high or too low and your results will be unrealistic). Historicaly, this value is around 9.5% or 10.5% but the current economic climate suggests something slightly lower. I would recommend a value of around 8.0%. If a significant portion of your funds are in bonds, treasury notes, CDs or other more stable investments you may want to use an even lower number. A discussion of investment returns can be found in Planning for your Retirement
Before Retirement Tax Rate This is your incremental tax rate, not your tax bracket. The incremental tax rate is the percentage of each dollar of all your income that goes to taxes. Your tax bracket is the percentage of each extra dollar that is taxed and assumes any extra income does not generate new deductions. Your incremental tax rate does not include non-income related taxes like property tax or sales tax but does include Social Security tax and Medicare tax. It is usually less than your tax bracket due to non-taxable income and deductions.

You can calculate this value from your W-2 information and Federal and State tax returns:
  • From you and your spouse's W-2s, add all the line 3 - 'Social Security Income' values together. This is your total income for the year. The W-2 line - 'Wages, Tips and Salary' already has the Social Security Taxes and some pre-tax medical plan, pension plan and other numbers taken out - don't accidently use this value, your income will be too low and the Before Retirement Tax Rate will be too high.
  • Add together all the income related taxes that you and your spouse paid. These include Social Security and Medicare Taxes, Federal and State Income taxes and any city or county income taxes you may have paid. If you received a refund you must subtract that from the total taxes paid and if you had to pay more at tax time - be sure to add that in.
  • Take the total taxes paid and divide it by your total income.
  • Multiply the result by 100 to get the percentage.
  • If you don't have your W-2 and tax return handy you can estimate it from the table below:

    Income Estimated Incremental Tax Rate
    $20,000 9.5%    
    $30,000 13.5%    
    $40,000 16%    
    $50,000 18%    
    $60,000 21%    
    $70,000 23%    
    $80,000 25%    
    $90,000 27%    
    $100,000 28%    
    $110,000 29.5%    
    $120,000 31%    
    $130,000 32%    
    $140,000 33.5%    
    $150,000 34.5%    
    $160,000 35.5%    
    $170,000 36%    

    This table is based on a 3 person family taking standard deductions. State tax is estimated at 30% of the federal tax paid. The family is not taking any additional tax credits or deductions.

    After Retirement Tax Rate Estimating an after retirement tax rate is more difficult since it requires all the information that the pre-retirement tax rate used along with additional information about your Social Security income. Social Security benefits are taxed at a rate that varies between 0% and 85%. The exact rate depends on your earned income and several types of common investment income.

    If you are retired you should calculate the value from your tax returns.

    To estimate this value:
  • If your after retirement living expenses are below $4,200/mo subtract 3% from your pre-retirement incremental tax rate.
  • If your after retirement living expenses are between $4,200/mo and $5,500/mo subtract 1%.
  • If your after retirement living expenses are above $5,500 your Social Security will be heavily taxed and you should use your pre-retirement tax rate for after retirement estimates.
  • Estimated Values

    You can enter estimates for the current value of your assets, income and expenses. This allows you to make quick (but less accurate) estimates of your financial status. Enable each estimate by clicking on the appropriate check box. When there is a check in the estimate box the values from the associated Asset, Income or Expense Worksheet is ignored and the estimated value is used in it's place. Each value is independent of the others. You can check them in any combination and only the checked estimate(s) will be used.

    Estimated Total Assets and Investments The total value of your current assets and investments. This is everything you own - your home, cars, stocks and bonds, retirement plan balances, etc., all lumped into one total value.
    Estimated Income Total income for both you and your spouse, before taxes. For married people, the program assumes that this is evenly divided between you and your spouse. The program also assumes the each person's share of the income disappears when that person starts receiving Social Security.
    Estimated Expenses

    Monthly expenses can be difficult to estimate. The Expense Worksheet is an excellent tool that can help identify your expenses.

    One way to make a quick estimate is to take your annual after tax income, divide by 12. From that number subtract your monthly savings. The result should be an approximation of your monthly expenses.

    When you subtract your savings make sure you only subtract money that you save for the long term, if you save up for several months so you can pay the car insurance or taxes that is good money management but it is not long term savings.

    Investment Data

    A snapshot of the Investment Data screen

    An investment is money you spend to acquire an item with the expectation that the item will have a larger value in the future than it does today. That is, you buy something hoping to make money on it.

    This program distinguishes between investments and assets. You buy an investment with the expectation of making money and buy an asset to have the use of it. Stocks, mutual funds and rental houses are investments. The house you live in, boats, cars and fishing equipment are assets. The difference can be pretty arbitrary and it is only used to help you organize your data. Both assets and investments grow at the Investment Return rate.

    Retiree Pre-Tax Investments

    401(k) or 403(b) Current balance in a 401(k), 403(b) or other tax deferred pension plan(s).
    IRA Current balance in any IRA(s) you may have.
    Roth IRACurrent balance in your Roth IRA(s).
    Other Total current balance of any other tax deferred investments.

    These categories hold the totals for their respective investment types. Find your latest statement for each account, add up the current balances and enter the totals.

    Spouse Pre-Tax Investments

    401(k) or 403(b) Current balance in your spouse's 401(k), 403(b) or other tax deferred pension plan(s).
    IRA Current balance in your spouse's IRA(s).
    Roth IRACurrent balance in your spouses Roth IRA(s).
    Other Total current balance of any other tax deferred investments he or she may have.

    Same as the Retiree Pre-Tax Investments. Add up the current balances and enter the totals.

    Other Investments

    These are your post tax investments, the ones where you paid taxes on the money before you bought the investment. When you sell these, you only need to pay taxes on the profit you have made.
    StocksTotal current market value of all stocks or mutual funds you own.
    BondsTotal current market value of all bonds you own.
    Certificates of DepositTotal current market value of all CDs you have.

    Asset Worksheet

    A snapshot of the Asset Worksheet screen

    The Asset worksheet allows you to list all your assets. Generally speaking, an asset is something you own to make use of and any increase in value is welcome but not the primary reason for ownership. Examples of assets would include the house that you live in, cars you drive routinely, a boat, etc.

    Enter the current value of all the assets you own. If you owe money on an asset you should enter the asset's total value, but make sure you enter any loan payments you are making in the Expense Worksheet.

    When you list a car as an asset you should list it's value as the value it will have when you sell it. Vehicles lose value at a rapid rate, as much as 20% a year for many new cars and trucks. Retirement Planner treats assets just like investments and increases their value each year by the Investment Return rate.

    The Asset Worksheet has a starting list of common assets and you can add additional items to the list.

    Income Worksheet

    A snapshot of the Income Worksheet screen

    The Income Worksheet contains 2 tabs, one each for you and your spouse. Be sure to enter each income under the appropriate tab or the Social Security calculations will be incorrect.

    It is also important that you enter an end date for each income entry, otherwise the program assumes the income continues forever and will cause errors in the calculations. This is different than the estimated income on the Personal Data page.

    Expense Worksheet

    A snapshot of the Expense Worksheet screen

    The Expense Worksheet contains a large number of tabs. Each tab is a category of household expenses and contains a list of expenses for that category. Don't be intimidated by the number of items - use it as a reminder and checklist to insure that you don't miss any of your expenses.

    Many expenses will either increase, decrease or disappear as time passes. For example, if you have a child entering college in 3 years (fall of 2006) you can estimate expenses for tuition, books, rent and food. Assign the expenses a start date of 9/1/2006 and a stop date of 5/31/2010. These college expenses would automatically be added into the total expenses in September of 2006 and removed from the expense total after May of 2010.

    You can also use the expense list as a general budget planner.

    Net Worth Timeline

    A snapshot of the Net Worth Timeline screen

    The Net Worth Timeline presents a graph mapping your projected net worth into the future. The extent of the graph is determined by the Years to calculate projection field in the Personal Data screen. The left edge of the graph shows the dollar amount. If the amount has a 'K' suffix it is showing thousands of dollars. A 'M' suffix is millions. At the bottom the horizontal axis shows dates in mm/yyyy format. Your projected net worth is shown in green. If you have a negative net worth (go broke) the line turns red. The program continues calculating even when the net worth is negative to give you an idea of how severe your problem is.

    The program places a flag on the graph showing the dates and values of your minimum and maximum net worth.

    Income/Expense Timeline

    A snapshot of the Income/Expense Timeline screen

    The Income/Expense Timeline charts your monthly income and expenses for the duration of the projection period. This allows you to see when there is a mismatch between the two.

    If the Income line (in magenta) is below the Expense line (in blue) it means you are spending more than you are earning. This may be part of your plan, or a sign of problems in the years ahead.

    Both curves have flags showing the time and date for their respective minimum and maximum values.

    The Expense graph and the Income graph both show dollars in the future at their inflated value. Keep in mind that inflation can have a powerful effect. 4% inflation will grow $3,000 dollars in monthly expenses (or income) into $12,500 each month in 35 years. This means that if you are 50 and living on $36,000 per year ($3,000 per month) now you will need $150,000 each year to live when you are 85. You must to plan ahead. $150,000 may seem like a fortune but 35 years from no, if inflation is 4% each year, it will buy the same overall lifestyle that $36,000/year buys now.

    Printing

    If you have registered the program and received an activation key you will be able to print a report from the program. The report includes the data from the various worksheets as well as the Net Worth and Income/Expense timelines.

    What To Do With the Answers

    You have entered all the data, now what do you do with it?

    First, go to the Net Worth Timeline page. Does the Net Worth line on the graph go below zero anywhere? If it does it means you are going to run out of money. If your Net Worth is negative by only a few thousand dollars, or even $15,000 or $20,000 you can probably make adjustments in your expenses to make up the difference. If there is a large negative value, something more than a years worth of income, you will have to make some significant changes, such as continuing to work an extra year or two, moving somewhere less costly to reduce living expenses, etc.

    You can make your retirement work by making relatively small changes now or major changes later. Earning and investing an extra $10,000 in the next two years may have the same effect as earning fifty to sixty thousand in twenty years and will probably be much easier to do. It can be tough getting into the job market when you are in your eighties.

    Second, look at the Income Expense Timeline. Whenever the blue Income line is above the green Expense line you are earning more than you are spending.

    When Income is less than expenses you are spending more than you are saving. This is not necessarily a bad thing. Remember, the idea behind retirement is to save enough so you can afford to quit working (and earning) and live off your savings. You need to be aware, however, of when this is happening - is it a surprise or part of your plan?

    Understanding the Results

    TODO: Write this section. Write a scenario explaining John and Mary's investments and how they used the program.

    Planning for Your Retirement

    This section asks questions but does not provide answers. The questions are designed to help you define your retirement goal and to help you focus your expectations. Once you have some focus you can begin estimating what the financial requirements of your goals are.

    In some ways, this is the most important part of retirement planning.

    Good Luck.

    Introduction

    There are three tasks in preparing and planning for retirement, or any other goal.
    Discover where you are - it is a journey, you need to know where you are starting from.
    Define your goal - if you don't have a goal you can't reach it, no matter how hard you work.
    Determine how to get there - what is the best path from here to there?

    Discover where you are

    The Retirement Planner worksheets help organize personal and investment data as well as assets, income and expenses. Taken as a whole, the worksheets give a picture of your current financial situation.

    If you use the estimated values on the Personal Data page the picture can be pretty blurry. When you turn off the estimates and use the various worksheets with correct current values the focus becomes much better.

    You should spend the time and effort necessary to fill in the numbers on all the pages. The improved accuracy is well worth the effort. The big advantage, however, is giving you a correct picture of your current situation.

    Define your goal

    What do you see when you picture yourself as retired? Try this imagery exercise - imagine that you are retired. Don't pick a special day, in this exercise you should select a typical day where nothing out of the ordinary is going on. Spend about five minutes thinking about what you will be doing on this one day of your retirement. Relax, close your eyes, see yourself living the day, waking up, eating breakfast, planning your activities, doing them, eating supper, your evening activities and bedtime.

    When you are done take some quick notes:
  • Where are you?
  • What do you do when you wake up?
  • What activities do you have planned?
  • Volunteering at church? the hospital? the library?
  • Working part time? full time?
  • Hobbies? Gardening? Woodworking? Puttering? Reading? Fishing?
  • Now ask yourself some questions:

    Is it realistic - Is this something that you can realistically do? Do you have the skills? Is it really interesting?

    Can you afford it - If you live like this what will it cost? Will you have enough saved up to be able to support this as a life style?

    Will you be happy doing it - Is this something you can do day after day without burning out or getting bored? Will the things you imagined start to be chores or remain pleasant activities?

    When you are done you should be able to write a short description of your retirement lifestyle.

    Think about what the new costs will be. If you are going to spend a lot of time in your garden, what will it cost for seeds, plants, fertilizer, tools, etc.

    Time on the golf course costs money - how much will your golfing expenses increase?

    Traveling is expensive - will you buy something like an RV? How much will it cost, how long will you keep it, and what will its resale value be? How many days and how many miles will you drive it each year? Calculate your total expected costs over the life of the vehicle, divide it by the number of months you expect to own it and add that in to your monthly travel expenses. Remember to add a Start Date and an End Date.

    Fishing is free, right? Not really. Make sure you count the extra travel costs, boat rental, license fees, etc. that you have when you spend more time fishing.

    Be fair to yourself, don't set the costs on these activities too high or too low.

    What money won't you be spending? Some of your expenses will go down after you retire. Your change in lifestyle will probably save you money on work clothes, lunches and snacks, etc. If your job required a daily commute of more than a few miles you may be saving $50 or more a month on car expenses. In an extreme case, you may even be able to eliminate a car and get rid of a car payment and a good part of your insurance.

    You can use the Expense Worksheet as a tool to work through these changes. Go through the lists of categories and items in the worksheet. For each item ask yourself if you think you will be spending more or less after retirement. If an expense goes away, enter your last work month as the End Date. If it is a new expense, add it to the list using your retirement date as the Start Date. If an existing expense increases or decreases enter an End Date on the existing expense and enter a new item using your retirement as the start date.

    Determine how to get there from here

    After you have entered all your current and future information you can examine the results. Click on the Net Worth Timeline.

    Remember, how you interpret the graphs is defined by what your goals are. If your goal is to not be a financial burden to your children then your Net Worth graph should have a positive value for the rest of your life. If your goal is to leave a legacy then your Net Worth at the end of your projected life should be large enough to fund that legacy. If your goal includes living in your home until you die then your Net Worth must be at least as large as the inflated future value of your home.

    If you are in the fortunate position of having your finances exceed your requirements you can set a more ambitious goal. Be cautious, however, because the graph is presenting inflated future dollars which can be very deceiving. Your future Net Worth and future expenses will both be measured in inflated future dollars.

    If you find that you can't achieve your goals you can go back and adjust the various elements to find a model that works. Always keep in mind that the Retirement Planner will work as a planning tool only if the numbers you enter into the program reflect your real activities. If you tell the program you are saving $100/mo and only save $50/mo the program won't be able to predict an accurate answer.

    There is only one thing you can do to effectively change your situation - increase your investments, either by increasing income or reducing expenses. The changes you make have to reflect real changes in your lifestyle. If you simply edit some numbers in the program without making the associated changes in your spending or savings habits you are not going to see the results you need.

    Increasing income - this is difficult to do. Most of us are working harder than we want and it isn't reasonable to go to our boss or customers and tell them we need more money. The very best we could hope for would be sympathy. However, if you have a hobby that you could expand into a small business or an interest in something that could earn money, this might be an opportunity.

    Reducing expenses - this is simple, just examine your budget to locate items you can do without then eliminate them. All it takes is cold will, steely determination, and daily discipline for the rest of your life. Actually, it's not that bad. Once you get out of the habit of having something you don't miss it, its only the transition period that is difficult. For example: I was in the habit of going to the coffee shop every morning and getting a Latte. $2.50 for a Latte every day for 50 weeks a year is over $600.00! Instead, I brew a thermos of coffee at home and bring it in. My coffee is better, less bitter and I can pick the flavor, and it costs me about $0.30 a day for two large cups. Keep in mind, though, it only works if you invest the savings. Increase your automatic withdrawal into your 401(k), pension plan or savings account and make yourself live on the remainder.

    Too much detail?

    I've included a large number of categories and items in the Expense Worksheet to serve as prompts to help you fill in all this data. It is important to have an accurate handle on expenses because they are tracked on a monthly basis and errors here are multiplied many times. Most errors in the Expense Worksheet are errors of omission, that is, you are more likely to forget to enter something than you are to enter it incorrectly. Errors of omission are worse than value errors. For example, if you forget to enter your $25/mo water bill it is a $9,000 error over a 30 year forecast but if you incorrectly enter it as $20/mo it is only an $1,800 error.

    You want to enter all your expenses and you want them to be as accurate as possible. This is an area where it is worth the time and effort to be careful and look things up on old receipts or from your checkbook.

    How many years should you plan ahead?

    The un-helpful answer is enough.

    For most of us, at the heart of what we want is to have enough money to provide for ourselves after we retire, through our frail years and to have enough left at the end to ensure we are not a burden to those around us and that our other goals are met.

    Since it costs more money to live longer the question of 'How much is enough?' is really two questions - 'How much does it cost me to live each month?' and 'How long will I live?'.

    It is possible to estimate what your monthly expenses will be, that is what this program is designed to do and I hope you find it helpful. This program won't help you estimate how long you will live, but there are resources on the internet that can.

    Two sites that are useful and aren't trying to sell something are:

    The Center for Disease Control maintains a National Center for Health Statistics web site. The site has statistics covering all aspects of health, including a life expectancy. They also have a 'fast facts' site at http://www.cdc.gov/nchs/fastats/lifexpec.htm which gives some simple statistics for life expectancy.

    Their statistics show that an American man who was 65 in 2000 should expect to live for 16.3 more years - or until slightly over 81. An American woman who was 65 in 2000 can expect to live 19.2 more years - or until slightly over 84.

    The Alliance for Aging Research maintains a web site at http://www.livingto100.com that contains a questionnaire with about a dozen simple questions about your health and lifestyle. After you answer the questions the site will estimate your life expectancy. This is almost certainly a more accurate estimate than the National Center for Health Statistics site because it is driven by the specifics of your health and your lifestyle.

    There are a couple of issues with the answers these web sites provide. First, they are too broad and general. The CDC estimate is based on an 'average' person. Collectively, we all group around a point that is the average but individually we are either above or below that point.

    The other issue is that the question that they assume we are asking is the wrong question. By giving the average age of death for some group they are giving the age at which half that population will die. If you make your plans assuming you will die at that age you have a 50% chance of living too long and running out of money. The living too long part is probably a good deal but the running out of money is not.

    My recommendation is to use these sites to create an estimate for your life expectancy - then, keeping in mind that this is a 50th percentile projection, add 0 to 5 years to it, depending on how accurate you think it is and your own opinion of your general health.

    Predicting the Future - What Will Inflation Be?

    Annual Inflation
    Calculated from Consumer Price Index January to January values

    Inflation is a difficult value to pin down. Unfortunately, it is also a fairly critical value since changing it up or down just one or two percent can have a dramatic effect on how your savings and investments appear to perform. The key word is 'appear' since changing a number in the program won't change the actual performance of any investment.

    Historically, our economy has moved through periods of low and high inflation. At the moment inflation is pretty low and given the sluggish economy it will probably stay there for the next year or two. Beyond that the crystal ball is very cloudy.

    The graph on the right shows that inflation was mostly in the range of 4% to 14% from 1971 to 1982. Over the last 20 years, 1983 until now, it has been consistently below 6%. The average over the entire period is 4.99%, a fairly high number and pushed up by the excess inflation of the 70's. The median value over the entire period is 3.85%. The average value over the last 10 years is only 2.54% but this has been a period of unusually low inflation.

    If you don't have a strong opinion I would recommend a value of around 3.5% if you are projecting for a period of 20 years or less. For longer projections I would pick something around 4.5%. Consumer Price Index Information.

    Predicting the Future - What Will my Investments Earn?

    Annual Change in S&P 500 and DJIA since 1980

    The return on your investments is another critical and difficult to predict value. The annual stock market returns for the large companies tracked by the S&P 500 and the Dow Jones Industrial Average (the DOW) have bounced around at an astounding rate. During 2002 the S&P 500 lost 23% and while back in 1995 it had made 34%. The stock market is not the only game in town, you can also invest in bonds, money market funds, CDs, real estate, etc.

    When you decide how you are going to invest your money you need to evaluate all the options you are comfortable with and decide between them. This program, however, isn't about how to invest, it is about understanding how to use your investments to pay for your retirement.

    Most of the alternative investment options pay less than the stock market but attract investors because they are less volatile and more predictable. Year in and year out, present time included, there are more investors and more retirement dollars in the stock market than anywhere else. Because of that, we will focus on the stock market as an predictor of investment returns.

    Since you are trying to estimate your investment return over a fairly long period of time it is reasonable to use a long term historical average as an estimate of performance. Between 1980 and 2002 the S&P 500 rose an average of 10.7% per year while the DOW rose 11.4%.

    The market this year is, however, pretty subdued and there is no real evidence that it is going to recover quickly. A reasonable estimate of stock market performance would be something less than the historical average of 10.7% to 11.4%. In addition, you - as an intelligent and educated investor - have diversified a bit and own some other lower paying and more stable investments.

    Taking all this into account, use either 7.0% or 7.5% for your estimate of Investment Return.