So far, the “Financial Planning 101” series has covered making a plan, organizing your goals, and cutting costs. This column will help you find and meet your retirement needs by answering three fundamental questions: How much? When? And where?

How much? The oft-quoted rule is that you will need 75 percent to 80 percent of your preretirement income. But this amount might not be adequate for everyone. Factors such as travel, consumer debt, increased medical costs, and whether your home is paid off can affect your retirement income needs.

Consider these two couples, for example:

Couple 1: Bob and Sue plan to retire in five years. Before they retire they will finish paying for their child’s college expenses and will pay off their mortgage. They pay off their credit cards each month, bought their cars with cash, and anticipate moderate travel expenses. They can live comfortably on 60 percent of their preretirement income.

Couple 2: Jim and Amanda also plan to retire in five years. They just finished a “cash-out” refinance with a new 30-year mortgage to pay off credit card debt, buy a new car, and help one of their children pay for graduate school. They also anticipate spending at least $50,000 on weddings for their two daughters within 10 years and plan a few expensive trips early in retirement. They might need 100 percent of their pre-retirement income to make ends meet!

Military retirees have a leg up on their civilian counterparts because of the base their military pension provides. But it can be a double-edged sword, because the benefit causes many second-career military retirees to underfund their 401(k), 403(b), or IRA. Investing $10,000 a year in a tax-deferred retirement account at 8 percent interest from age 45 to 65 yields $490,000. Waiting until age 55 to start investing reduces the amount to $152,000.

When? Early retirement sounds great to most people until they examine the effect on retirement savings and the cost of replacing employer-provided health care. Military pensions and TRICARE health coverage provide military retirees with flexibility that most civilians don’t have. Retiring before age 591/2 means you will pay early withdrawal penalties on qualified retirement money.

Also, retiring before age 62 means you will not yet be eligible for Social Security benefits. Is it better to take benefits at age 62 or wait until full retirement age? It depends. Generally, it takes 14 to 15 years just to break even if you wait until full retirement age to draw benefits. Go to www.ssa.gov and use the
benefits calculator to figure out your break-even age.

Where? There is a reason Florida draws so many retirees: no state income tax. Choosing the right state can make a big difference in your retirement standard of living. Housing costs, state income tax, taxes on Social Security, and taxes on military pensions are key considerations. These states either partially or fully exempt military retired pay from income taxes: Alabama, Alaska, Florida, Hawaii, Illinois, Kansas, Kentucky*, Louisiana, Massachusetts, Michigan, Mississippi*, Missouri*, Nevada, New Hampshire, New Jersey, New York, North Carolina*, Oregon*, Pennsylvania, South Dakota, Tennessee, Texas, Washington, Wisconsin, and Wyoming (*with conditions).

The MOAA 2004 Tax Guide, available online at www.moaa.org, offers a comprehensive state-by-state listing, allowing you to compare the tax benefits and drawbacks of each state.
Next month’s column will discuss building an investment portfolio.