Finding the right ‘magic number’ for retirement savings is not as easy as you may think

Finding the right magic number for retirementThere is no magic formula when it comes to retirement savings goals

Some believe that simply pulling a large number out of the air, such as “I need to save a $1 million nest egg in order to retire comfortably”, is all the retirement plan they need. Others believe that saving 75 – 80% of their current salary for retirement income is a good safe bet.

But, the reality is that such broad generalizations may only apply to a certain demographic of the population, and they often miss the mark. Once you consider an individual’s personal income, expenses, lifestyle, family life expectancies, and other variables, the forecast changes considerably.

Some rules of thumbs can do more harm than good. Picking a number too large as a target, can often force a saver to put aside more than they need and unnecessarily deprive themselves of life’s pleasures. Or, they may become overly aggressive with their investments, and take on unsuitable and unnecessary risk.

Picking a number that is too small can also lead to problems. It may cause financial overconfidence and the acceptance of a savings rate that is too low, whereby an individual ends up never having saved enough for retirement.

In the end, there is no substitute for having a Certified Financial Planner® (CFP®) run a properly constructed retirement income forecast and expense projection, where all assumptions are evaluated for accuracy specific to the situation of the future retiree. Only after all the assumptions have been discussed and agreed upon (including retirement expenses, retirement age, family mortality rate, inflation rate, rate of return on investments, etc.), is your Vermillion Advisor ready to begin a complete retirement projection.

As a result of this customized analysis, you will know the most accurate target number range of assets required to enjoy the retirement life you wish. While the results may be unexpected, depending on how long until the beginning of retirement, the needed savings rate will be accurate, and that information will be essential to your future plans.

Without an accurate retirement projection and savings plan, individuals caught unprepared typically have only a few options available to address the retirement asset shortfall:

1. Delay retirement and continue working
2. Lower the retirement income target by resetting your expectations
3. Try and “catch-up” by altering your lifestyle and cutting all current expenses as much as possible
4. Use a combination of all these options to better prepare for future retirement needs

Why you may need to save more than you think

Although you may anticipate needing less income in retirement, it helps to calculate the figures conservatively. It is always better to save more than you think you’ll actually need. Two common mistakes consumers make are in overestimating the amount of savings they will see when their work expenses decrease, and underestimating the amount of their discretionary spending.

While it is true that many current financial expenses will change with retirement (e.g. employment expenses disappear and your health insurance costs decrease), these expenses are often replaced with other new expenses. Instead of driving to the office, you may be driving to the golf course more often. Medicare will be less expensive than your former health insurance, but now you may carry long term care insurance that was not previously part of your expenses. In fact, now that your free time has increased and work is no longer part of your everyday routine, you may actually end up spending more money than before by taking extended, more elaborate, or more frequent vacations.

In retirement there are three phases, “the go-go years, the slow-go years, and the no-go years”. Most retires front-load their retirement activity goals into the early retirement years, while they are still healthy. So budgeting for extra travel and hobbies to fill expanding leisure time makes sense in the early years of retirement.

The biggest retirement wild card of all is unknown health-care costs. The Employee Benefit Research Institute estimated that an average 65-year-old man might need $70,000 in savings, while an average 65-year-old woman needs $93,000, just to have a 50% chance of fully funding their projected health-care expenses in retirement. “

Why you may need to save less than you think

Most people in the United States who work (or whose spouses work), are entitled to receive Social Security benefits. Depending on your wages, those benefits typically replace between 20% and 60% of your pre-retirement income. Social Security benefits are a guaranteed income stream from the US Government that will increase each year throughout your retirement based on the consumer price index. Social Security benefits reduce the amount you will need to save for retirement. It is suggested that you get your specific figures from the Social Security Administration in lieu of using any broad estimates. (Create an account at for information about your estimated monthly payouts, based on your work history and expected retirement age.)

Traditional pension plans are becoming a thing of the past, having been replaced with 401k and SIMPLE IRA plans, for example. In many cases, employers will contribute to employee accounts – provided the employee contributes as well. These employer “matches” often range from 2% to 10% of an employee’s annual salary. This additional support lessens the pressure of having to save for retirement all on your own. If you have a 401k (or similar plan) available to you, it is wise to take advantage of your employer’s generosity. It can make a big difference in the ultimate size of your future retirement assets.

While an individual cannot control taxes or inflation, they can take advantage of tax deferred savings and the magic of compound interest. If your savings are put into tax deferred accounts, nothing is lost to taxes before retirement, you have more to contribute, and with compounding interest on the larger amount, your account balance can build faster. If the rate of return on your investments is above the rate of inflation, your savings will not lose the future buying power that inflation takes away. Therefore, choosing investments with this in mind, and using tax deferred accounts will be an advantage for your retirement savings, and you may not need to set aside so much of your current earnings.

Trying to find your “magic number” for retirement savings on your own can be complex and risky. It should be determined as part of a comprehensive retirement planning and expense projection that is customized just for you, and performed by a CFP® professional, such as your Vermillion Financial Advisor.


Note: The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendation for any individual. Please remember that past performance of investments may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this post serves as the receipt of, or as a substitute for, personalized investment advice from Vermillion Financial Advisors, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed within this newsletter to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.