Last Updated Feb 8, 2010 1:23 PM EST
I > E
The "I" is your retirement income, and the "E" is your expenses. The goal is to develop reliable sources of retirement income that cover your living expenses, no matter how long you live and no matter what happens in the economy. The goal may seem overly simplistic, but it's much easier said than done.
Your retirement income will include such sources as Social Security, pensions, savings, 401(k) plans, and income from work. Your expenses will vary, but the average American spends 75 percent of their household budget on following five expenses (in this order):
Most retirement planners focus on the "I" part of the formula, which is only half of the story. To make sure you have sufficient resources for retirement, you've got to determine the right balance between income and expenses, a balance that will make you happy and meet your needs, both before and during retirement.
Before you retire, any excess of "I" over "E" represents savings, most likely for your retirement. I advocate that you make conscious decisions about the tradeoff between spending for today and saving for your future. Need motivation? Most of us have older friends or relatives who are struggling in their retirement years and wish they had saved more and spent less. Learn from them.
In future columns, I'll provide strategies for maximizing your "I" and minimizing your "E" for the rest of your life. These strategies aren't rocket science; they're mainly common sense. I aim to remove the mystery surrounding retirement planning, so you can apply your common sense.
Planning wisely for your retirement simply means making every dollar count on both sides of the magic formula, and using all the resources available to you -- financial and non-financial. Given that we're talking about the quality of the rest of your life, I advocate that you make the effort to manage the magic formula for retirement security.
By the way, I didn't invent the magic formula; it's been around for awhile, as indicated by this quote from Charles Dickens in David Copperfield:
"Annual income twenty pounds, annual expenditures nineteen six, result happiness. Annual income twenty pounds, annual expenditures twenty pound ought and six, result misery."Image from iStockphoto contributor Skyak