If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them. -- Henry David Thoreau

People have a tremendous capacity for self-deception. We think we look good when in fact we look silly (Exhibit A: Your high school prom picture). We think something is valuable when in fact it is not (Exhibit B: the shares of telecom stock in your portfolio you don't like to talk about much anymore). And, all too often, we think we are on sound financial footing when in fact we really haven't a clue (Exhibit C: the rest of this article).

How much money will you need to live a happy and prosperous retirement? Do you know? Do you even have a good idea of what factors should be considered in making that estimate? For a surprising number of us, the answer is "Probably not." A recent Washington Post article cited research that indicated that a shocking percentage of American workers are underestimating their retirement needs by one-third or more. "It's mass delusion," one expert was quoted. "People are in for a terrible, rude surprise."

In order to make sure your own dreams of a happy retirement are not just castles in the air, you need to have the following:

  1. A well-grounded sense of exactly what it will cost to live in your retirement years. One rule of thumb is to plan for expenses of at least 80% of the income of your working years, but we've heard from many retirees that this is a myth and you may need an even greater cushion.

  2. A crystal-clear picture of where you are financially, right now, today. That means facing up to the realities of your current financial status -- your debts, your expenses, and your ability to generate income. (We've got a quiz that'll give you a simple snapshot of where you are right now.) This is vital when planning your retirement!

  3. A solid retirement plan  to help you get from today's circumstances to the future you are imagining. TMF Money Advisor members can use the DirectAdvice online financial planning tool to study a variety of scenarios, experiment with various approaches to saving and investment, and discover what each might bring over the years.

Pull just about any personal finance book off the shelf, and, somewhere in the early chapters -- often conspicuously close to page one -- you'll find instructions on calculating your net worth. The same way many diet or exercise regimens will call on you to begin by examining yourself naked before a full-length mirror, the process of calculating your net worth will reveal many of the weaknesses and blemishes of your current financial situation. (And both exercises have a high likelihood of sending you screaming from the room in horror.)

Noting those figure flaws up close and personal can likewise be a great motivator for fixing what is wrong. If you've got excessive debt, or if too many of your assets are at risk in speculative stocks -- or wasting away in bland, low-interest accounts that can't even keep up with today's tepid rate of inflation -- a sober examination of your finances can reveal such imbalances.

It is an elementary calculation but an essential one. The math involved in making your net worth calculation is easy enough for a third grader to understand. You just add up the value of everything you have and subtract the sum of everything you owe. The remainder is the big, red "YOU ARE HERE" dot on the map of your financial life. It is the place, if you care to look at it that way, where your plan for financial improvement must begin. Knowing the location of that point will allow you to chart your course to the places you want to go and begin to plan for your retirement.

You might even be pleasantly surprised by your calculations; sometimes things like the appreciation of the value of your home or growth in a stock fund you've neglected for some years can sneak up on you.

Once you've defined where you are and where you are going, charting your course between these two points becomes an exercise in saving and investment. By determining how much you need to save, and estimating the rate of return on the investments you make along the way, you can wind your way from the place you are to where you hope to be. That's called making your dreams come true. If you're years away from that golden day and need a hand navigating the course, check out the Roadmap to Retirement self-paced online seminar to map out your plan.

If your retirement is just around the corner, it's even more important to make sure that you're in the right financial ballgame. As you near or enter retirement, your financial needs shift and so should your strategies. To help the soon-to-be or recently retired crowd, we've developed the Rule Your Retirement online seminar. For a limited time, new TMF Money Advisor subscribers can get this seminar at no additional cost. This seminar will show you how to tackle your changing money needs as you approach or achieve freedom from the rat race, leaving you with a plan tailored to meet your changing needs. And then you can go on to use TMF Money Advisor to bring your retirement plan to life.

Whatever you do, it is important that you make your decisions according to the realities that life has placed before you, so that your actions respond to the world you live in rather than some muddled version of it.

So build your castles in the air, Fool. Like Thoreau said, "That's exactly where they should be." Just make sure the foundations you build under them are firm.

Jerry Thomas lives in the real world, despite a recent sharp rent increase there. The Motley Fool's disclosure policy is the real deal, too.