Deciding how much you might want to spend in retirement can be difficult. Establish a baseline now so you can plan your savings targets and then refine the budget as you go along.

Start your plan with the budget you need now to support your current lifestyle. Look through the list and decide which items will definitely not be there in retirement. These might include children's expenses, such as day care, clothing, school and sports fees, and college tuition. Also probably gone by retirement will be college savings, and of course your investments toward retirement itself.

Only delete the expenses that are clearly not going to be there in retirement. Don't try to estimate how much the grocery bill will go down without the kids, how much you'll save on gas by not commuting, or what you'll save on clothing or dry cleaning by not having to go to the office. These smaller expenses will be replaced by other, similar expenses in retirement. Remember, the reason you're projecting your budget now is to know how to prepare for retirement. If you shortchange yourself by shooting for too low a goal, you'll be disappointed by how much you can spend when you retire.

The Cost of Fun

Now that you have the basics considered, add in the extra costs of things you'd like to have money for. This might include additional travel and hobby costs that you don't pay now. If your hobby could make you money, avoid the temptation to overestimate what you could earn. It's better for planning purposes to be conservative and figure that the hobby will cost more than it earns.

Self-Employment Income

Self-employment income is a great way to supplement your retirement savings. But if you have never worked for yourself, be careful of being overly optimistic about what you'll earn. Unless you're a seasoned self-employed person and can use past experience as a guide to what you can earn, it's better to plan for no income and then use any income you might earn to enjoy a little extra spending in retirement.

Self-employment income is taxed more highly than regular job income because you are both employer and employee. As such, you have to pay both sides' share of the payroll taxes. A good rule of thumb is to set aside 30 percent of whatever you make for income taxes.