By Cynthia Flash
Special to The Seattle Times

Want to be secure in your retirement planning? When you calculate what you need, assume you'll get less than you expect from both the government and your employer.

Conventional retirement planning says that you can draw on three sources for retirement income: Social Security, a pension and your savings.

But today you'd be smarter not to rely on the projected payout numbers from Social Security or a company pension fund, especially if your retirement date is years away.

Best advice: Depend more on what you can save on your own.

Here's what you can and can't count on — and how you can take care of yourself:

Shrinking Social Security

Benefits will likely shrink in the future as the number of recipients outpaces the number of workers. Today there are 3.4 workers paying into the system for each Social Security beneficiary. By 2030 — the year the youngest of the baby boomers turn 66 — that number will decrease to 2.1 workers for each beneficiary.

In addition, the cost of Medicare, Medicaid and supplemental health insurance keeps rising and taking a bigger bite out of those Social Security paychecks.

With all the recent changes, benefits offered by Social Security, Medicare and Medicaid will continue to evolve, impacting people differently depending on their ages and financial situations. The trend, however, is toward reduction.

"My opinion is you will get something from the government, but it will probably be less than stated," said Henry "Bud" Hebeler, a former Boeing president who currently runs a retirement-planning Web site: www.analyzenow.com

What you can do

To be safe budget assuming stingier government benefits.

'Guess-timate' pension projections

Even aside from the pension-fund shortfall question, workers depend too much on employers' projections of how much they can expect in pension payouts, Hebeler warns.

The projections are only guesses, based on assumptions that workers will be with the company their entire careers and will receive annual raises.

"When companies make a forecast, they assume a certain percentage increase in your wages," he said. "If you don't work that long, the amount goes down very rapidly because you're reducing the number of years and wages assumed."

What you can do

Find out your company's forecasting formula and how it applies to you. For example, if pension projections are based on yearly 4 percent raises and 20 years of employment, and you don't meet or you exceed those figures, adjust accordingly.

Problem pension funds

More than 60 percent of the companies in the Standard & Poor's 500 have underfunded pension plans, according to a recent Credit Suisse First Boston study. Latest to make headlines: Kaiser Aluminum, which cited its underfunded pension plan in asking a court to free it from having to pay its retirees promised medical and pension benefits.

At the end of 2002, Boeing had the fourth-biggest pension deficit, behind General Motors, Ford Motor, and Exxon Mobil. Credit Suisse First Boston analyst David Zion estimated Boeing's pension plan was $7.14 billion short and that the shortfall would grow to $10.7 billion this year.

While this may sound alarming, it should concern workers only if their company fails — as did Enron, for example.

At that point, they'd have to rely on the government's increasingly overburdened pension-insurance company to bail them out — in part.

The government doesn't guarantee it will give employees what their employer promised. Instead, it pays only a fraction, based on when the employee and the company were terminated, never to exceed $40,000 a year.

What you can do

Some companies report the health of pension plans to shareholders. However, sometimes the information is buried or obscure. The best thing individuals can do is ask their human-resources department about the health of their company's retirement fund — and keep an ear out for news reports that raise red flags.

No pension at all

Employers are moving away from traditional pension plans, or "defined benefit" plans, and toward "defined contribution" plans, which are the tax-deferred 401(k) and 403(b) plans (the latter only for employees of nonprofit tax-exempt employers) that encourage workers to save on their own.

According to the U.S. Labor Department's Pension and Welfare Benefits Administration, the number of defined-benefit plans declined from 175,000 to 56,400 between 1983 and 1998.

Companies are putting the onus on the individual.

What you can do

Take full advantage of these tax-deferred plans. And save.

Seattle lawyer Norm Milks helps companies set up employee-retirement plans. His advice, based on 25 years in the business:

MISTAKE 1
Underestimating needs
"Most people overlook medical costs, the fact that now they have more free time, they want to do more things like travel," said Yvonne Hall, a financial planner in Issaquah. "A lot of them want to help their kids and grandkids."

MISTAKE 2
Underestimating longevity
Hall encourages her clients to plan as if they will live to age 90 or 100: "You don't want to last longer than your money does."

MISTAKE 3
Overestimating rate of return on investments
Rather than assuming they'll earn 8 or 9 percent in retirement, Hall advocates lowering expectations to earning 4 to 5 percent.

Knowing what you need
Figuring out how much you need to retire is not easy. But financial experts have some ways to help you at least have a clue.

Estimating your living cost

If you're within 10 years of retirement: Figure out your current expenses, then subtract expenses you'd no longer have, which could include mortgage payments and socking away money into a retirement plan.

Also, budget more for health-insurance costs, which you can expect to increase because your employer no longer will be paying those premiums.

Once you run the numbers, you should have a fairly good idea of what you'll need to live on.

Henry "Bud" Hebeler, a former Boeing president, has a free budgeting tool for people to use on his Web site: www.analyzenow.com

If further away from retirement: You can just assume you'll need the same amount you're currently earning.

Budgeting for health care

A man who retired at 65 and died at 80 would need $80,000 if he had employment-based insurance or $116,000 if he didn't (assuming 7 percent inflation) to pay his out-of-pocket, lifetime medical expenses, according to a February report by the nonprofit, nonpartisan Employee Benefits Research Institute.

The disparity between the two figures largely reflects reimbursement for prescription-drug costs included in work-based plans. The newly enacted Medicare prescription-drug benefit will alter that some, but may not affect it that much, the study's author says.

Meanwhile, more companies are cutting retiree medical benefits.

More info: www.ebri.org and www.choosetosave.org

Income from your savings
If you are earning a certain amount per month now, how much will you need at the time you retire to continue to have that much money to spend? The following examples do not include Social Security or pension payouts, since those are variables that are difficult to predict today. The examples include how much money you would need to have in liquid assets (cash, savings and other assets that can be turned into cash quickly; not including your home). These figures assume a 6 percent rate of return.