Now's the time to take a close look at your income and expenses and develop a realistic retirement budget.

What you'll spend in retirement depends on several things. For instance, where will you live? Will you have a mortgage or pay rent? How much will medical insurance cost? Answering these questions will help you create your budget.

Here's a simple way to get started:

• First: Start by adding up your anticipated monthly expenses. Be sure to factor in taxes and extras such as long-term health care and financial responsibilities to children or elderly parents.
• Then: Separate these expenses into two groups: essential (housing, taxes, food, clothes, utilities, transportation, health care and insurance) and discretionary (travel, gifts and high-end entertainment).
• Next: Tally up all sources of income other than your portfolio, such as Social Security, pensions, salary or real estate.
• Finally: Subtract your anticipated expenses from your anticipated income to see how realistic your budget is.

If you're coming up short, you can ramp up your retirement savings plan and find ways to save more.

As mentioned above, your income in retirement will most likely come from several sources, including your portfolio. So how big does your portfolio need to be?

After factoring in taxes, inflation and a realistic rate of return, the Schwab Center for Financial Research has developed a simple formula. It suggests that you aim for a portfolio 25 times larger than the amount you plan to spend in the first year of retirement, less the income you expect from other sources.

Here's how that might look:

If you create an adequate cash cushion, you won't be forced to sell your longer-term investments at the wrong time to generate cash. To make sure you're prepared to weather a bear market, it's wise to do the following:

• Set aside enough cash to cover your expenses for at least 12 months in a liquid savings account.
• Keep an additional 2 to 4 years' living expenses as part of your fixed income allocation if you can. Consider ultra-short or short-term investments, longer-term CDs or a deferred fixed annuity.

If you still have assets in a 401(k) or other employer-sponsored plan from a former employer, consider consolidating them into a Rollover IRA for greater flexibility and easier management. Here's why:

• A Rollover IRA gives you access to a wide variety of investment choices, including mutual funds, stocks, bonds and CDs—significantly more than most employer-sponsored plans. At the same time, you maintain all the benefits of tax-deferred growth.
• Having all your retirement assets in one place makes it easier to monitor investment performance, rebalance as necessary and plan for your income needs.
• When the time comes to take required minimum distributions, it will be easier to calculate them.

You have three choices for when to take Social Security. You can:

• Take it as early as age 62
• Wait until what the IRS designates as your "full retirement age" (between 65 and 67, depending on when you were born)
• Or wait as late as age 70

If you take it early or late, you have to weigh a number of factors, including certain penalties and credits that can affect the amount of your Social Security check.

Important considerations

• If you begin taking benefits before your full retirement age, your monthly check will be reduced by as much as 25 percent. That reduction is permanent for as long as you collect Social Security. The plus side, however, is that you'll receive checks for a longer period of time.
• If you take Social Security before your full retirement age and you're still working, your benefits will be reduced one dollar for every two dollars you earn above the annual limit ($14,160 for 2009). In the year you reach your full retirement age, one dollar in benefits will be deducted for each three you earn above a higher limit ($37,680 in 2009). Starting the month you hit your full retirement age, your benefits are no longer reduced no matter how much you earn.
• If you postpone taking Social Security past your full retirement age, your benefits go up by 8 percent for every year you delay until age 70. You'll get bigger checks—but for a shorter period of time. Past age 70, there's no added advantage to waiting.

Unsure about when you should begin taking Social Security payments? The Social Security Administration has a handy calculator that can help you decide what makes the most sense for you. In general, if you are in good health, it is best to wait as long as you can (up to age 70) to start collecting benefits.

Social Security and taxes
Your Social Security benefits may be taxable, depending on your modified adjusted gross income (MAGI). As your MAGI increases above a certain threshold (from earning a paycheck, for instance), more of your benefit is subject to income tax, up to a maximum of 85 percent of your benefit (see below). For details about taxation of your benefits, see IRS Publication 915.

For all kinds of Social Security information, including your annual Social Security statement, go to SSA.gov. Get the facts before you make your decision.

Medical insurance is a must at every stage of life. At age 65 you'll be eligible for Medicare, but you still have to factor in the cost of a supplemental health insurance policy and prescription drug coverage. You have the following options:

• Medigap policies are standardized policies offered by private insurance companies. The policies must follow federal and state laws and be clearly identified as “Medicare Supplemental Insurance.” However, costs can vary, so it's a good idea to carefully compare plans.
• Medicare prescription drug coverage is insurance that covers both brand name and generic prescription drugs at participating pharmacies in your area. It's in addition to your Medigap policy, and it can help protect you against unexpected drug costs. Once again, there are a number of plans to choose from, so it's wise to comparison shop.

You can find out more about these plans and much more pertaining to healthcare at Medicare.gov.

It's wise for everyone to begin the estate planning process as early as possible. An estate plan is important for a number of reasons, including:

• It helps to ensure that your money and other assets go to the people you choose. Without a plan, state laws will determine your beneficiaries.
• It specifies who will care for your minor children if you become unable to.
• It may be able to minimize estate taxes and other transfer taxes.
• It lets you avoid the costs, publicity and delays of probate and the legal process used to value your estate, settle any debts, pay taxes and transfer assets to your heirs.
• It helps to ensure that you and your affairs are taken care of in the manner you wish if you should become incapacitated.

An estate plan can also be crucial to family harmony. By handling your estate plan now, you can help avoid family surprises later.