Don’t get hung up on a savings number
The internet abounds with retirement calculators to help you estimate the size of the nest egg you’ll need, so that you don’t outlive your retirement savings. It makes sense. Business gurus tell us you can’t improve what you don’t measure.
We set other measurable goals in our lives, so what’s the problem with aiming for, say, $5 million in savings by age 65? It sets us up for complacency, says Vicki Bogan, associate professor of economics at Cornell University in Ithaca, New York. “Anchoring on a specific number — and saying once you get [to] that number you’re done — is not the best idea,” she says. “The calculation of that number is predicated on a lot of assumptions.”
Experts generally recommend having enough savings to generate about 80% of your preretirement income annually, after factoring in what you’ll get from Social Security and any pension.
You’ll need a larger amount if inflation increases, the stock market falters or your health care costs rise more than expected. Your savings goals can be scaled back if you move to a less expensive area or if inflation stays low.
Right now, a booming stock market is convincing people to retire early because they’ve already hit “the number,” says Allison Schrager, senior fellow at the Manhattan Institute. “I can’t blame them. The retirement industry has been really negligent in getting people overly focused on that number.”
Meanwhile, that obsession has done nothing to improve retirement security. Only 36% of current retirees say they saved the right amount, compared with 45% who believe they saved too little and 18% who saved more than necessary, according to a 2020 survey by the Employee Benefit Research Institute.
Although having a retirement savings number is important, it’s also a moving target. Fixating on one number runs the risk that you won’t adjust your savings goals to new circumstances, such as additional financial responsibilities, higher health care costs, inflation or the vagaries of the economy.
Instead, create a comprehensive retirement plan that you’ll refine and change over time. It should include your financial goals, a net-worth statement, a working budget, debt management strategy, emergency funds and any insurance.
Any retirement plan also should reflect your expected retirement lifestyle, investing horizon, risk tolerance, savings goals and estate planning. You’ll want to consider how your retirement savings hold up under different scenarios, simulating extreme market conditions or unexpected life events, to be sure your bases are covered — stress-testing a plan.
A financial professional can help you do it, or use Microsoft’s free online Retirement Financial Planner template to see how your savings and income are affected when you adjust for inflation, retirement age, health care costs or the rate of return.
Revisit the plan every few years while you’re accumulating assets and whenever you have a life change, such as switching jobs, losing a family member or moving. As retirement nears, the plan should factor in your required minimum distributions, so that you match your income to your expenses and minimize your tax burden.