Retirement planning: It’s more than just a magic number
Key takeaways
- The biggest fear of those saving for retirement is that they’ll outlive their savings.
- There are many retirement theories and calculators that can provide the “magic number” or the amount you need to save to ensure financial independence in retirement.
- The factors that impact the “magic number” are uncertain, and thus retirement savers should be more focused on developing a retirement plan, not reaching a number.
Thinking about a future when you no longer have to work is both exciting and anxiety provoking. One of the biggest fears of pretty much everyone preparing for that future retirement is the fear of outliving savings. That’s why, in my career as a financial planner, clients often ask me to provide them with “the magic number” — the amount of money they need to have amassed to ensure financial freedom and comfort in retirement. It seems like a simple and reasonable request — and quite honestly, one of the reasons people often seek out financial planners.
But retirement planning is anything but simple. And though there are many rules of thumb and even online resources and tools to calculate what’s considered the holy grail of planning — the magic number — I believe that providing one number for retirement is too simplistic. It can also be counterproductive and even psychologically and financially damaging if that number is incorrect — as it often is.
Retirement planning, like all planning, is based on a series of variables. As such, the accuracy of a plan is based on the accuracy of those variables. For some types of planning, such as education, the variables can be easily identified and ballparked: the timeframe, current tuition cost, inflation rates, and investment returns. This makes it much easier to estimate the funds required to plan for a child’s education. In contrast, the variables are more uncertain with retirement planning. For example, what’s the average life span? What will happen with inflation, market conditions, and savings rates? How much will you spend in retirement?
In my experience as a wealth manager, the amount of money projected for one’s retirement is often underestimated or unattainable. Why, then, would having a “magic number” that’s not accurate or attainable be helpful? I believe it isn’t. It also contradicts the most fundamental goal of retirement planning — taking a course of action to achieve your objectives.
This isn’t to say that planning for uncertain conditions is pointless; rather, I believe that the process of planning is actually a process and not a magic number. That process involves making ongoing and sometimes major adjustments in the journey to financial independence. That journey can be complicated, with unexpected twists and turns. An effective and experienced financial planner will have been down this road with others and can guide you to where you want and need to be.
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