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Today's expenses give us only a snapshot of where we'll be in the future. And the longer you are away from retirement, the fuzzier that picture may seem. We use our Cash Flow Statements to help us determine these expenses. Later on in this seminar we'll come up with some concrete figures to help bring that hazy snapshot into laser-sharp focus. For now, consider these:

• Healthcare costs are rising. Can you factor that into your planning?

• Will you be providing for the care of your elderly parents?

• Do you have, or plan to have, children born later in life? Will you be paying for them to attend college when you're getting ready to retire?

In Lesson 8, we'll spend some time filling out our Cash Flow Statement. If you look at it now, you'll see that there are multiple columns -- one for your income and expenses today (which you can start filling out now), one that lets you record some of your estimates, and several that correspond to different periods of your retirement. You'll be working with these columns in Lesson 8, but its best to start with today. Having a solid handle on your current spending, you can actually project your money needs quite accurately into the future.

Estimating Costs
Rob Bennett, our early retirement instructor, uses the "Multiply by 25" Rule for a quick assessment of lifetime cost. He explains:

"I took each expense in my monthly budget (from books to electricity to vacations), multiplied it by 12 to get an annual expense figure, and then multiplied by 25 to get the lifetime cost of that item. The reason I multiplied by 25 is because I presume a 4% real rate of return on my savings. If you assume a 3% rate, you need to multiply by 33; 5% would have you multiplying by 20."

Let's explain this, and then give an example.

It's a handy little formula, developed by mathematicians who are still stuck in a maze somewhere in Palo Alto. What you're trying to do is to figure out how much money you need to set aside now in order to guarantee that you'll be able to meet a certain monthly expense for a long time -- for eternity, in fact. First you figure out what your real rate of return (i.e., the return as adjusted for inflation) on your savings will be (Rob took 4%). You divide that into 1.00, and it gives you a number -- 25. Multiply your annual expense by that number to arrive at the "lifetime expense" -- that's how much you need to set aside now to cover those costs in the future.

For example, if you spend $20 a month on books, your annual expense is $240.

You multiply by 25 to get your lifetime expense: $6,000. So you'll need a $6,000 book fund to produce the $20 you'll need each month in the future. If you use this equation, your principal will never be diminished by inflation. Says Rob: "Once you know the lifetime cost of an expense, you can also estimate how long you need to work to pay for that expense. If it takes you six months to save $6,000, that's about how long you need to work to satisfy your future book habit in retirement."

That money sitting as an investment earning that rate of return will provide the needed annual income forever, and when you die the kids will be very happy because they will get the principal with which you started (provided the government doesn't tax it away).    

Estimating Income
You can also estimate the amount of money you will have for retirement based on where you currently stand. We'll do some more in depth estimates a little later to help you out, but the retirement calculator is a handy tool to get a general sense of where you stand. 

We will warn you that the calculator is merely a tool -- it is not your bible to retirement planning. What it will do is give you some approximations and general projections to verify that you are on the right track to meet your monetary retirement goals. The rest of the lessons will help you refine those projections and create a complete, realistic plan.

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