• Add up your current expenses. Make sure the list is as complete as possible, including regular monthly expenses as well as irregular, periodic expenses, such as insurance premiums, tuition, and gifts. If you’ve prepared a detailed budget, much of the work will already be done. If you don’t have a budget, most of the information can be found by examining cancelled checks, credit card bills, and tax returns. If you can’t account for more than 5% of your income, you may need to take a closer look at your cash purchases.

• Estimate which expenses won’t be incurred in retirement. Once you retire, you won’t need to save for retirement anymore. Other expenses that are likely to go away include commuting costs, some clothing expenditures, and meals while working.

• Determine what additional expenses to expect after retirement. This will depend in large part on how you plan to spend your retirement years and will typically include items like travel and entertainment. At this point, you want to plan for your ideal retirement lifestyle. Don’t forget to consider health care costs. Even if you qualify for Medicare, most people incur substantial out-of-pocket costs.

• Decide what expenses you can cut back on. This analysis will become critical if you can’t afford your ideal retirement. Break down your expenses between essential and discretionary. Essentials will include food, utilities, health care, transportation, and housing. Discretionary could include travel, entertainment, and purchases of luxury items. Cutting back on discretionary items is not your only alternative. Perhaps you can move to a smaller home or pay off your mortgage, both of which could dramatically lower your expenses. Or, you might only need one car instead of two after retirement.

Once you decide how much retirement income you need, you can calculate how large a nest egg you’ll need at retirement. Be as accurate as possible, since overlooking just one or two items can significantly change the income you’ll need.