Pre-Retirees: Don’t Plan for Your Retirement with a “Magic Number”

$1.46 million: That’s the latest “magic number” indicating the amount of money people need to accumulate for a comfortable retirement, according to the 2026 Planning and Progress study recently released by Northwestern Mutual. Is that the number you should use to decide whether you can afford to retire? Do you believe in magic?

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A Magic Number Won’t Reflect Your Needs and Circumstances

The trouble is, that magic number isn’t based on a thorough financial analysis. Instead, it comes from a survey of 4,375 U.S. adults age 18 or older regarding their attitudes about retirement, prepared by The Harris Poll. That’s just not a reliable number for most pre-retirees to use to plan their retirement.

Many people might answer a survey question about the amount of retirement assets they need based on guesses, hunches, what their brother accumulated for retirement, or information they read on the internet. But would that approach give you confidence for planning your retirement around that number?

It’s not hard to imagine circumstances wherein $1.46 million could be way too little or way too much to save for a comfortable retirement. For example, consider a couple who live in a low-cost area in the Midwest, have paid off their mortgage, are eligible for full Social Security benefits, have earned a generous lifetime pension, and want to spend their time in retirement with grandkids who live close by as opposed to taking expensive vacations. In their case, $1.46 million could easily be overkill.

On the other hand, consider a couple who live in an expensive townhouse in Manhattan, haven’t earned any traditional pension benefits, and expect to travel considerably in their retirement years. In this case, $1.46 million could fall far short. And there’s a wide range of people’s circumstances between these two extremes.

The Northwestern Mutual study agrees: “… each person's retirement need depends on their individual goals and circumstances, such as when they want to retire, where they'll live, and what kind of lifestyle they want to maintain throughout their retirement years.”

What’s Better Than Using a Magic Number?

Using a single magic number as a savings target might be OK for people under age 50, just to get them focused on building retirement savings. But once retirement is on your radar, perhaps when you’re age 50 or older, you’ll want to replace magic with the power of doing actual calculations. Your goal is to analyze how you’ll satisfy the common-sense formula for retirement security:

• I > E, or retirement paychecks greater than living expenses

Start by building a portfolio of regular retirement paychecks consisting of Social Security, pensions if you’re eligible, an annuity, and systematic withdrawals from retirement investments. Estimate the total amount of regular paychecks you’ll get from these sources, based on the age you want to retire.

You’ll also want to estimate your monthly and nonregular living expenses in retirement, which can change considerably compared to your working years.

Finally, you’ll want to develop strategies to protect against common retirement risks, such as stock market crashes, high medical bills, costs for home and car repairs, and long-term care.

If you forecast that you’ll have sufficient retirement income to cover your living expenses in retirement and you’re protected from the common risks noted above, you might decide that you can afford to retire comfortably. If not, then you’ll need to consider a retirement Plan B. Such a plan could include working longer, looking for ways to increase your retirement income, and finding ways to reduce your living expenses.

The Extra Work Is Worth It

This may seem like a lot of work, and for many pre-retirees and retirees, it might be beyond their skills and experience. In this case, you might want to work with a qualified retirement advisor whom you trust to work through the numbers with you. The Northwestern Mutual study provides plenty of evidence that working with an advisor gives people more confidence about retirement. For example, 66% of survey respondents who have worked with an advisor answered yes to the statement “I know how much money I will need to retire comfortably.” For those who don’t work with an advisor, just 36% answered yes to this statement.

The bottom line: Don’t rely on magic. Instead, do the hard work that will give you confidence you’ll be able to afford retirement. Then go enjoy your life!

By Steve Vernon, Contributor