October 11, 2019
A few weeks back, Maeve surprised us with a visit home from college. She’s the happiest I have seen her in years with all of her new friends, parties, and academics. And while her two sisters, Phoebe and Sophie, would never admit they missed Maeve, the three of them were joined at the hip the whole weekend.
On Saturday morning, while I was cooking everyone breakfast, Maeve entertained all of us with her new hobby: magic tricks. One of her tricks invariably included a deck of cards, and I had to pick one – and she then guessed what my “magic number” was. For a beginner, I’m impressed – she guessed right!
It reminded me of TV commercials I used to see that asked you what your number is; you know, that magic number that will ensure you the retirement of your dreams. Since then, I’ve also read article after article online that asks you what your “number” is. And I realized that the concept of selecting your retirement number isn’t that cut & dried.
Folks, if I were to ask you, “What’s your retirement number” – would you know? A number of recent studies have shown that the majority of Americans have no idea how much they really need to save for retirement – rather, many just guess an arbitrary round number, such as $1 million. While having a random savings goal is obviously better than none at all, finding a more accurate retirement number doesn’t have to be that complicated.
You see, figuring out how much we need is just one half of the equation – because it’s also important to translate that end number into how much you invest today. To reach your goal, you need to be able to set aside enough to actually retire someday within close range of that “magic” number. And, well, that’s the catch – there isn’t a secret number or mathematical formula that will do the trick for everyone. A lot depends on how much you need and when you plan to retire.
For example, the Employee Benefits Research Institute, a non-partisan data and research firm, surveyed the savings habits of millions of individuals. Based on their research, they recommend that for those early in their careers – in their 20’s – you should try and set aside at least 10% of your paycheck for retirement. Whether it comes from you or your employer doesn’t matter – if your employer contributes 3%, then your share is at least 7%. If the company kicks in 5%, then you should contribute at least 5%. If your employer does nothing, you should set aside at least 10% of each paycheck on your own.
According to their research and simulation models, the EBRI suggested that a contribution rate of 10% starting in a worker’s mid-20s cuts the risk of running out of money in retirement to about 30%, less than one chance in three. Contributing more than 10% when you can will give you a better cushion. Of course, 10% is a guideline, not a guarantee. Even then, I’m not sure I want to bet my chances of outliving my income on 1 in 3 odds. But this gives you a starting point for determining how much you should be socking away now.
Of course, many of us aren’t in our 20’s any longer, so if we’re just starting to save now, 10% probably won’t be nearly enough. Not only that, a number of financial experts are now saying that your EXPENSES, not just your income or your total savings, should help guide your retirement planning.
So, rather than just choosing an arbitrary number based on how much you’re living on now, many recommend that first you should figure out how much money you want to live on each year during retirement. Basing your retirement savings goal on your expected annual expenses – rather than your current annual salary or a certain percentage of it – makes a lot of sense. This will involve figuring out what your actual expenses in retirement will be, as closely as you can calculate. This means answering questions like, where will I live? Will I downsize or sell my house? Will I have a mortgage or other significant debt that reduces my income? How long do I plan to work? How much will health care cost? Will I still be financially assisting my children or parents? Will I want to travel, pick up new hobbies? And just as important – how much will things actually cost? Inflation slowly eats away at the purchasing power of our money over time, so calculating how this will affect the cost of goods and services years down the line will be crucial if we want an accurate estimate.
Now, once you know approximately how much your expenses will be in retirement each year, you can calculate those out for 20-30 years (the time period obviously will depend on how long you expect to live, based on your health, family history, age at retirement, and more). This should give you a rough idea of how much you may need throughout your lifetime. Subtract out your other sources of income, with Social Security and pensions being two of the most common, and you can now get a feel for how much of a shortfall you need to save for.
Hang in here with me here, folks? Ok, now that we have an idea as to how much to set aside for retirement, we can work backwards to figure out our “number” – that percentage we should be putting aside now to get us to our goal. This means making some assumptions about the rate of return we can expect to receive over time, as well as accounting for taxes due when we start taking income from our assets. And, you know, don’t be afraid to ask for help; this is where the help of a qualified retirement specialist may be of help.
Getting to your “number” is one thing – investing to reach that number with the right mix of financial vehicles in an extremely volatile market, well, gets a bit complicated. Your portfolio should be built to not only choose the right assets, but it must also help put you in the highest probability of financial success. What is your current retirement system to get you to and through retirement? Do you have one? Should you? You betcha, and if you don’t, well, make sure to seek out a specialist who can help you develop a retirement system to help put you in the highest probability of financial success.
As you can see, preparing for retirement with any level of certainty involves math – and some very careful calculations. But a secret formula or magic number? Ahh, leave that to the amateur magicians like my kid Maeve, because it would be a cruel trick to reach retirement and realize you’ve been fooled by faulty assumptions and formulas. And that’s why my advice is always the same:
Be vigilant and stay alert, because you deserve more!
Have a great week folks!
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC
Registered Investment Adviser with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at email@example.com.
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