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Is my retirement on track?

That's a common question that we often try to help people answer on our help line and in our workshops. According to our research, a majority of workers across all age groups and income brackets have never run even a basic retirement projection to see if they're saving enough to reach their goals. In fact, many aren't even sure what their goals should be.

Defining those goals and what retirement means to you is a good place to start. After all, it's hard to know whether you're on track if you don't know where you're going. Have fun and do some daydreaming. Ask yourself what you would do with your time if you never had to go to work again. Would you travel the world or just spend more time at home with your family? Would you do more volunteer work or start a side business? Would you relocate to a warmer climate or never want to leave your castle?

Answering these questions will help you create a mental picture of what your retirement could look like. Write your answers down. That will make your goals more concrete, and you're more likely to achieve concrete goals.

Now, it's time to start looking at the numbers. You can start with this basic retirement plan estimator (Excel file). Let's take a look at each step.

Your income needs

The first line is the percentage of your current income you will need in retirement. Financial planners generally say people typically need about 80%. For one thing, you won't be saving for retirement or paying into Social Security after you retire. A 10% contribution to your 401k plus the 7.5% payroll tax is 17.5% right there. Add in more savings from not commuting and eating lunch out every workday. (Will your 401k provide enough? Find out with this MSN Money calculator.)

But keep in mind that you may not be typical. If you want to travel the world, you might need 100% or even more of your current income in retirement. On the other hand, if you expect to have some big expenses, like your mortgage, paid off and will be spending more time close to home, you may need less than 80% of your income. If you're getting close to retirement, you may want to use a budget worksheet for a closer look at your expenses -- and how each of them may change -- to get a more accurate estimation of your retirement income needs.

Your Social Security benefits

The next couple of lines are whether you want to include Social Security and how much you expect to receive each month. While the Social Security Trust Fund is projected to be depleted in 2036 or 2037, that doesn't mean Social Security will completely disappear. Instead, the program should be able to pay out about 75% to 80% of what is promised, so you may want to reduce your estimated benefits by 25% to account for the funding shortfall. You can get your estimated benefits on the Social Security website.

Pensions and other income

If you're among the few people fortunate enough to have a pension, you can enter your expected monthly benefit in the next line. You should be able to find out how to get this number from your human resources department. You can enter other income from sources like a rental property, part-time job or side business in the next line.

Historically, inflation has averaged about 3% a year. If you think inflation may be higher in the future, you can use a larger number to see how that could affect your retirement.

Life expectancy

The average 65-year-old man will live about 20 more years, and the average 65-year-old woman will live a few years longer than that. But you may not want to plan for average, especially if you're in good health and have had longevity in your family. Consider planning to live to 95 or even 100. That's because if you end up living longer than you planned for, you could outlive your money and spend your last few years eating dog food. On the other hand, if you err on the side of planning to live longer than you actually do, you'll just end up leaving more to your heirs.

Retirement plan and IRA

The next couple of sections are for details about your retirement accounts and your spouse's. The only tricky one is the rate of return. You can assume 8% if you're aggressive, 7% if you're moderate and 6% if you're conservative. If you're not sure what you are and how you should be invested, check out this risk tolerance questionnaire and asset allocation worksheet (.pdf file) for guidelines based on your time frame and comfort with risk.

However, keep in mind that the key to achieving those average rates of return is to stick to a properly diversified portfolio and re-balance it periodically rather than jumping in and out of different investments at different times. If you're not sure which funds to pick, see if your plan provides options like target date funds or balanced portfolios. It may also provide more customized recommendations through a program like Financial Engines.

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Putting it all together

Once you've entered all the information, the last section will show you whether you're on track to retire and, if not, how much more you'll need to save. If that savings goal seems unaffordable, you may want to try setting a later retirement age, investing more aggressively or thinking about what expenses you can cut back to be able to live on less income in retirement. The important thing is to find the right balance for you.

If you need to save more to reach your goals, it will be important to keep yourself motivated to stay on track. Go back to the original mental image of your dream retirement lifestyle. Find a real, physical image that represents that dream, and put it someplace like your refrigerator door, where you'll see it regularly. It may sound a bit cheesy, but it sure beats not having goals.