A retirement savings analysis is done to calculate the amount of money you will need to save now for use in your retirement years. The assumptions used to calculate your retirement savings plan include:

• The age at which you want to retire
• Your projected monthly expenses
• Your life expectancy
• The amount of money you will need (based on your life expectancy and your projected monthly expenses)
• An anticipated rate of return on your investments

An anticipated rate of inflation
Chances are this was calculated some time ago with assumptions that have now changed. It is a good idea to periodically run the calculation with updated assumptions so that you can keep your savings rate on track. Several calculators on the Internet can help you do this. The calculation is a good estimation of whether you are contributing enough money to your retirement savings plan, as components determining that rate can change. These calculators were easy to use:

• http://www.bloomberg.com/invest/calculators/retire.html
• http://moneycentral.msn.com/retire/planner.aspx

Input your current information into the calculator. The result is your baseline. Are you saving the amount of money that was calculated? Now, do the analysis again, but adjust those assumptions using the guidelines discussed ahead. Then, with the help of your investment advisor, you can tweak your savings plan accordingly to ensure that you will have enough money for your retirement years. Rerun the calculation periodically to make sure your savings rate is on track.

Make sure you use accurate assumptions. Don’t fall into the trap of:

Underestimating Your Life Expectancy. According to the Journal of Science, population researchers Jim Oeppen, from Cambridge University, UK, and Dr James Vaupel, from the Max Plank Institute for Demography in Rostock, Germany, reported that the average life expectancy has improved by a quarter of a year every year since 1846. If that trend continues, half of 60-year-olds could live an average of another 25 years. Currently, the average life expectancy for women is 83 years old and for men is 79. What life expectancy did you use in your initial analysis?

Solution: You can calculate your life expectancy here:

• http://moneycentral.msn.com/investor/calcs/n_expect/main.asp
• http://diskworld.wharton.upenn.edu/mortality/perl/CalcForm.html

To ensure you don’t outlive your money, readjust your life expectancy upward to reflect the new data. Then add another 5-10 years to that. Seriously consider increasing your savings contribution to reflect a longer life expectancy.

Overestimating the Rate of Return on your Investments. Although the financial markets have enjoyed major gains in recent years, those returns even out over the long term, due to inevitable market downturns.

leading authority on asset allocation, Ibbotson Associates, collects data on various asset mixes and their historical rates of return. Their research has indicated that from 1926 to 2006, the most aggressive portfolio invested 100 percent in risky, small-growth companies and returned 12.7 percent. A portfolio invested in the more stable S&P 500 companies returned 10.4 percent. The Intermediate Term Government Bond portfolio returned 5.3 percent, and the least risky portfolio comprised of U.S. Treasury Bills returned 3.7 percent. These rates of return are eroded by the rate of inflation.

Since it is too risky to have a portfolio comprised of all small companies, and the return on U.S. Treasury Bills can barely keep up with the rate of inflation, your portfolio is probably comprised of a mix of these various asset classes, with the intent of hitting a targeted rate of return.

You can determine if your portfolio is on target. Using one of these asset allocator calculators, input your current asset allocations to determine the expected return.

• http://www.bloomberg.com/invest/calculators/assetallocator.html
• http://moneycentral.msn.com/investor/calcs/assetall/main.asp

Is the calculated expected return in line with your portfolio’s real rate of return? How does your real rate of return compare to the rate of return assumption made in the initial analysis?

Solution: Input different asset class combinations and watch how the expected rates of return change as the asset mixes change. Observe how these returns fluctuate over the long and short term. Now return to the retirement planning calculator and rerun that analysis assuming a rate of return that is lower than what you are actually getting. Use the rates of return generated by the asset allocator as your guide. Consider adjusting your asset mix or your savings contribution to make up for the shortfall between your expected rate of return and your real rate of return.

Underestimating the Rate of Inflation. According to Ibbotson Associates, the rate of inflation from 1926 to 2006 averaged 3 percent. However, a closer look reveals periods of time when inflation rates reached double digits—like in 1980, for example, when inflation surged to 13.5 percent. A retirement savings plan assuming 3 percent inflation will fall short if future inflation rates reach double digits. What rate of inflation was assumed in your initial analysis?

Solution:Investigate historical inflation rates at http://www.inflationdata.com/inflation/default.asp. Note the different rates of inflation during war, depression, recession, and prosperity. Rerun the retirement savings calculation using a higher rate of inflation than the historical average of 3 percent. If you want to be really conservative, use an inflation rate between 5 percent and 7 percent. You may want to adjust your savings program if your inflation assumption was too low on your initial retirement savings calculation.

Underestimating the Cost of Your Health Care. Health care costs are a double-edged sword. These costs are rising 2.2 percent faster than the U.S. economy, which puts the cost increases ahead of the inflation rate! Then, as you age, your monthly health care expenses will rise because of an increased use of prescription medication, as well as more frequent doctor and hospital visits due to a higher propensity for failing health or injury. How much did you assume your health care would cost you in your initial analysis?

Solution: Even though some of the retirement calculators make assumptions about your monthly expenses (90 percent of your monthly income prior to retirement), take a hard look at them anyway. Use one of these monthly expense calculators to help you project as well as inflate your monthly expenses:

• http://www.bloomberg.com/invest/calculators/budget.html
• http://moneycentral.msn.com/investor/calcs/n_retireq/main.asp

Increase the amount of money projected for health care expenses a little bit higher than you anticipate. Then inflate the health care cost another 3 percent (1.03 x the dollar amount of your adjusted health care expenses), to help adjust for these rapidly rising costs. To ensure you don’t erode your nest egg with health care costs, consider increasing your savings contribution.

The calculators provided will help you to get a decent estimate of your future financial status. It is important that you familiarize yourself with your retirement savings rate and the assumptions that were used to calculate that rate. It is vital that you have a realistic view of your monthly expenses, especially your projected health care costs, to ensure that your nest egg will stay intact.

Periodically performing the retirement savings calculation with updated assumptions will keep you on track. It will be reassuring to know that you will have enough money to last your lifetime, even if you live longer than expected, have higher-than-anticipated health care costs, have a lower-than-expected rate of return on your portfolio, or experience unanticipated inflation that could decrease your future spending power. If you have been working with an investment advisor, it is important to consult that person before making any changes to your retirement savings plan.

It is important to consult your investment advisor before making any changes to your retirement savings plan.