If you earn $25,000 annually, Social Security will replace about 40 percent of your earnings. However, at higher income levels, Social Security replaces far less income: just 28 percent if your average annual earnings are $40,000 and only 20 percent if you earn $60,000. You will need to replace between 55 and 65 percent of your before-retirement income from various sources. The maximum pay taxed by Social Security is $68,400 in 1998.

If you are elderly or disabled, you may receive Supplemental Security Income (SSI). SSI is a federal welfare program for the elderly and disabled run by the Social Security Administration. Money for it comes from general taxes, not Social Security taxes. The monthly payments you can expect from SSI are far less than what you would receive from Social Security (Table 1).

You can close the gap between Social Security payments and the income you will need in retirement without becoming a workaholic or an obsessive saver. When estimating your retirement needs, follow these four steps:

Financial emergencies are facts of life. While we can't predict exactly what kind of financial emergency will occur each year, financial emergencies, sometimes very severe ones, are going to happen. Not having a savings fund for emergencies can be very costly and very worrisome.

Even in these good economic times, layoffs are claiming about a half-million workers a year. It's a trend that is likely to continue as companies respond to hard times by reducing the size of their workforces. Some workers have found themselves caught up in such downsizing several times. Many of these people who have been laid off are unprepared for such an emergency because they have high levels of personal debt and little or no savings. Moreover, men and women are often rehired at wages averaging 10 percent below their previous wages. Men 25 to 54 years old are often rehired for wages averaging 20 percent below their previous wages. Even if you receive severance pay, you may need to use some of your savings for times when you don't have an income. The amount of your emergency savings fund should be one-months' gross pay for every $10,000 in salary. Also, remember that this emergency fund has to cover all emergencies, not just times of unemployment. When planning the amount of your emergency fund, consider the following factors:

• Debt load. If you have a lot of debt, you will need more emergency funds.
• Income stability. You'll need more emergency savings if your income fluctuates, is unpredictable, depends on commissions, or is seasonal.
• Job security. Job security is fast disappearing. If this is a possibility, and if you have no working spouse, you need to have a larger emergency fund.
• Chance of a long-term disability or illness. If your health or your family's medical history is problematic, you'll need a larger emergency fund.
• Chance of a large expense such as your parents' nursing home care or other family emergencies. "Layer" your emergency fund by placing some money in passbook savings and some in a money market mutual fund. If a financial emergency occurs, you can use your passbook savings or your money market fund, or you can borrow against the equity in your home mortgage with a home equity loan.

Contribute To Employer-Sponsored 401(k) And 403(b) Plans

One out of four Americans today is not taking advantage of the best savings and investment alternative available partly because they fear locking up their money. Employer-sponsored 401(k) or 403(b) plans allow you to save up to $10,000 per year from your gross income and are fully tax deductible. In addition, your employer contributes a certain amount to your 401(k) or 403(b) plans.

If you haven't been contributing to a 401(k) or 403(b) plan, there are catch-up provisions for people who have at least 15 years of service with an employer. In these cases, employees can contribute as much as 20 percent of their income, up to $12,500 annually. A $15,000 lifetime cap applies to cumulative catch-up contributions of more than $10,000.

Borrowing Money From A 401(k) Or 403(b) Plan

Most people think that the only time they can take money out of these plans is at retirement, if they become disabled, or upon reaching age 591/2. This is not true. You are allowed to take out a loan or make a withdrawal from your 401(k) money when you really need the money. Twenty-three percent of people who borrow from a 401(k) plan do so to start a business, buy a house, or pay down debts. However, remember that when you borrow money from your plan, you are taking money out of your retirement fund needed for your retirement.

Pay Off Your Mortgage Early

Paying off your mortgage early is very important. Not only can it become a key means of saving for retirement, but money saved in this way is flexible. With a home equity loan, you can deal with a financial emergency or help pay for a child's college education. Also, if you become unemployed, your mortgage holder may be more willing to make temporary adjustments or other concessions in your monthly mortgage payment if you have been prepaying on your mortgage.

Money saved by paying off your mortgage early is tax deferred and earns interest at the same rate as your mortgage interest rate. In other words, prepaying an 8 percent mortgage is the same as earning 8 percent interest tax free on your prepayment. For someone in the 28 percent tax bracket, it is equivalent of earning 10.24 percent on a taxable investment like stocks or mutual funds.