If you are five years or less away from retirement, you're close enough to calculate approximate income and expenses. Your goal is to have enough money to live on comfortably and not outlive your assets. You need to match your expected lifestyle expenditures with your projected cash flow and provide for contingencies, such as extended illness, rapid inflation, and losses in your investments. Cash flow planning is an important part of retirement planning.

Are there other regions of the country where opportunities are better for continued employment or leisure activities? Are you concerned about living in an area where there are better local services (transportation, medical facilities)? How about more affordable housing and senior citizen communities? Make sure you list your priorities and start acting now.

Review Your Sources of Retirement Income

As we mentioned, people generally have three sources of retirement income:

• Social Security
• Employer pension plans
• Personal savings

Will You Qualify for Social Security Retirement Benefits?

To be eligible for Social Security retirement benefits, you must have earned 40 credits (typically 10 years of work). You earn credits based on the amount of earnings you have in one calendar year. You can earn no more than 4 credits in any calendar year. The credits make you eligible, but it is your history of earnings and age that determines your actual benefits.

If you are eligible, you can begin receiving benefits at age 62. But if you receive benefits prior to full retirement age (see the section When Can You Collect Full Social Security Retirement Benefits?), you will receive a smaller monthly benefit. (Any subsequent cost-of-living increases will still be applied to your reduced benefit.) Get an estimate of your Social Security benefit by reviewing your Social Security Statement, which is sent to you annually.

SUGGESTION: If you are not already receiving Social Security benefits, the Social Security Administration will automatically send you an annual Social Security Statement. If you have not received this statement, call Social Security at 1-800-772-1213 and ask for Form SSA-7004, Request for Social Security Statement. It can be requested via the Internet at www.ssa.gov.

If you continue to work after you begin receiving benefits, your benefits may be reduced. Also, depending on your adjusted gross income, a portion of your Social Security benefits may be taxable. See the section Social Security—How Much Can You Earn Without Reducing Your Benefits?

Pension Plans

If you are vested in a pension plan, your future well-being requires that you understand the details of your plan. How would another year or two of work affect your retirement benefits? Will Social Security benefits be reduced because of your earnings? What survivor options are available and how do they affect your monthly benefit?

What withdrawal options does your plan offer? You may have to choose between a variety of payout options. Your choice will have a significant impact on your financial future. See the section Selecting a Distribution Option for more information.

Your employer is required to give you information about your plan. Also, your human resources department can explain the plan to you and give you an estimate of your pension benefit. You will need this information to determine how much more you may need to save and to start analyzing your payout options.

Deciding on a Payout Option

The payout option you elect is probably one of the most important decisions you'll ever make. That's because your decision is irrevocable. Understanding your distribution options is crucial to your planning. With a defined benefit plan, your employer may give you a choice of a fixed monthly payout known as an annuity, a lump-sum, or a combination of both.

With a defined contribution plan, you may be able to exercise these options:

• Annuitize your total investment and receive a fixed monthly income.
• Leave your money in the plan until you need it, or until the age that minimum distributions must begin (generally age 70½).
• Take it as a lump sum distribution and report it as taxable income in the current year, or defer taxes by either rolling it over to a traditional IRA, or by rolling it over to a new employer's plan within 60 days. You may be able to postpone distributions from your current employer's retirement plans if you are still employed even if you are older than 72 ( 70½ if you reach 70 1/2 before January 1, 2020) (This doesn't apply if you are a 5% owner, that is, you own more than 5% of the company.) Distributions from a Roth IRA can be postponed beyond age 72 (70½ if you reach 70 !/2 by January 2020 whether you are employed or not.

SUGGESTION: If you have both a defined-benefit plan and a defined-contribution plan and don't need all the income at once, consider taking an annuity payout from your defined-benefit plan and investing your money tax-deferred in the defined-contribution plan.

Personal Savings

Your personal savings include amounts in qualified employer retirement plans, such as your 401(k) plan, lump-sum defined-benefit pension distribution, IRAs, and other savings you have earmarked for retirement. Make sure you won't be tapping your personal savings for other needs before including them in your retirement savings calculation.

IMPORTANT NOTE: In addition to your investment holdings, you should establish an emergency fund of approximately three to six months of living expenses.

IMPORTANT NOTE: While diversification is an important risk management tool, it cannot guarantee profit or protect against loss.

SUGGESTION: You can time certain investments by using a strategy called laddering. Using fixed-income investments with fixed maturity dates, such as Treasuries, certificates of deposit*, or bonds, you divide your investable dollars into equal amounts (say five). Then put one-fifth into instruments maturing in each of five years. If interest rates go up when the first maturity date comes, you reinvest at the higher rate. If rates have declined, only one-fifth of your portfolio has to be reinvested at this lower rate, while the rest continue to grow at the higher rates. Spreading maturities in this manner should increase your yield over time, and produces a steady flow of income. *NOTE: certificate of deposits are FDIC insured up to $250,000.00 when issued by your bank or depository institution.

Beyond these calculations, you should complete a thorough inventory of all your assets. It will be helpful to calculate how long your principal will last under different assumptions of how quickly you withdraw it. You may want to—or need to—consider early retirement. On the other hand, it may be that you can't retire yet and need to find ways to build up your retirement assets. One of these may be a Roth IRA, which is a tax-advantaged way to save.