What Is Your Retirement Number?

As featured in Louisville Business First: https://www.bizjournals.com/louisville/news/2020/08/03/whats-your-retirement-number.html?fbclid=IwAR2iKvUM8qLpvVd0mT6wezzEMwFObKOfsbfpfgdnf-l3StiDeyQorW0URNw

There was a series of popular commercials back in 2008 created by the financial services company ING around their “What’s your number?” campaign. The ads portrayed people walking around holding large orange numbers in lieu of briefcases or purses as they went about their daily lives. The numbers correlated to their retirement number: the amount of money they needed to save in order to retire comfortably. The idea is that you carry this number around with you, and any decisions you make throughout your life affect how quickly it grows (or shrinks).

The idea is to simplify retirement savings and equate it to planning for any other financial goal you have in the future. If a car you want costs $20,000, once you save that amount of money, you can make the purchase. In theory, retirement should work the same way — except it doesn’t. Thinking that having a specified dollar amount saved by a specified date is singularly sufficient to meet the financial needs for the entirety of your life is an oversimplification of retirement planning, and it often doesn’t take into account life happening along the way.

It’s certainly helpful to have goals as you save for the plunge into retirement. But it’s probably more effective to view retirement planning as an ongoing process. I often tell clients that a plan is a picture — a snapshot in time. Planning, however, is more like a movie. There is a starting point or beginning. We are introduced to the characters; we grow to like them and become invested in their well-being.

Over time, a story begins to unfold. There is tension, which creates action and forces the characters to begin making decisions. These decisions ultimately lead to some type of a climax. In some cases, the characters get to where they always wanted to go. But we’ve all seen enough movies to know that most of the time the character’s story arc must change as events unfold around them, and the final destination is far different than the one they originally had in mind.

So rather than a specific number, what should you be considering as you progress toward your story’s resolution? I’ve found that it’s much more effective to define your retirement goals first. When do you want to retire? What social activities would you like to do? Where would you like to travel? How much money would you like to leave to your children? What charities would you like to donate to?

From there, you can begin to assess how much retirement income you’ll need to meet these goals. It’s a fallacy (that is propagated by many financial companies out there) that you’ll only need 75%-80% of your current income to live in retirement. I’ve found that most people, when you ask if they’d like to take a pay cut in retirement, would prefer not to. The whole point of retiring is to do things you could not do while working, or splurge on the luxuries you’ve spent a lifetime saving for.

Figure out your income needs and how much of that is met by things like Social Security and pensions. The gap between these protected sources of income and the number of expenses you accrue is the first riddle to solve for in retirement. This is the amount you’ll be drawing from your savings and retirement accounts to ensure all your income needs are met.

Here’s an example. Let’s say a retired couple needs $7,000 per month in income. Between Social Security for both spouses and a pension with a survivor benefit, those three sources of income equal $4,000 a month. There is now a $3,000-per-month need for income that the couple must meet by drawing down on their assets in some way. They can answer that first riddle by evaluating which accounts to draw from in the most tax-efficient way possible throughout their lifetime to meet that $3,000 per month need.

The second riddle to solve is a bit more complex, and what I suggest is far more important than any retirement number calculation. This involves figuring out what levels of risk are acceptable to take in a portfolio that will ensure this couple is able to generate that additional income need, while at the same time ensuring that they won’t face the most common fear retirees have: running out of money.

Far too often I see retirees taking much more risk in their portfolios than is necessary to achieve their goals. It’s always a balancing act between finding effective ways to grow a portfolio and taking on so much risk that you are exposed during a market downturn like we experienced earlier this year.

If you have questions about how to walk that tightrope, you should speak with a qualified financial professional. Ultimately, saving for retirement is not about hitting some magical number in your bank account. It’s about taking the number you do have and finding the optimal way to ensure it lasts as long as you need it to.

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