The Magic Number for Retirement – Is It a Myth?
Do you remember those commercials that showed Americans holding on to ribbons that represented their “magic number” for retirement? You know the one where each person’s ribbon was a different length and was meant to show us that retirement plans are not all the same. The amount you need to retire comfortably on will depend on the individual so each “magic number” will be different. I don’t recall whose advertisements these were, but the concept of having a magic number stuck out for me.
You see, having helped hundreds of folks over the years design and deploy sound retirement systems, I agree with the premise that everyone’s retirement will be unique. There is no one formula that we can apply to everyone to ensure a successful retirement. For example, some folks might want to retire at age 60 and travel extensively for a few years, whereas others might plan to work until 70 and then spend their time gardening, volunteering and otherwise living a less extravagant lifestyle. Life span will be a factor as well. If you have several centenarians in your extended family, you might want to plan to live longer, perhaps significantly longer, than someone whose family has a history of terminal health issues.
But what made me scratch my head about those commercials was the suggestion that we all have a “magic number” that we need to attain in order to retire, and it’s the primary way to determine when we can retire. I thought about this after grabbing a beer with an old Maritime buddy recently at the Quahog, I’ll call him “Ted”. We were commiserating about the Patriot’s subpar performance this year and Ted said that if they didn’t step it up soon, he’d be coming in last in his fantasy football league. He joked, “At this rate, I’ll never make it to $1 million so I can retire”. He went on to say that once he and his wife hit $1 million in savings, they agreed that they could quit their jobs and start the next chapter in life.
While I understand the simplicity of having a savings number that you’re striving for, this can’t be your only savings goal. Sure, accumulating a big pile of money can offer some financial comfort, but it means very little if you can’t turn that lump sum into a measurable and predictable income stream to support your lifestyle in retirement. Once you stop working, that paycheck stops coming in and you need to rely on your savings to produce the income you need to live. You’ll hopefully have many years in retirement so you need a system that outlines how your assets will create predictable income to fund not only your basic expenses, but also the fun parts of retirement like travel and entertainment. Folks, it tends to be more complicated in your distribution years as opposed to your accumulation years. You see, in your distribution years your investment plan has to coexist with your income plan.
But you know, unfortunately, too many are still striving just for that big number. Get this, according to a recent Northwestern Mutual’s 2023 Planning & Progress Study₁, most believe they will need $1.27 million to retire comfortably. That number continues to increase, up from $1.25 million reported in 2022. And those considered high-net-worth individuals – those with more than $1 million in investable assets – believe they’ll need $3 million to retire comfortably.
But most workers have a long way to go towards this “magic” number, the report finds. On average, Americans have set aside $89,300 of the $1.27 million they think they’ll need. That average ranges from slightly less than $36,000 in retirement savings for those in their 20s, to nearly $114,000 for people in their 70s – leaving them significantly far away from their required savings goals.
Now, these numbers don’t lie, but they also don’t tell the whole story. For example, what happens if you reach your goal of retiring with $1.27 million in an outdated buy and hope accumulation strategy, only to experience a market crash 2 years later that cuts your money in half? If you are invested solely in the market through your IRA or company 401k plan, the “magic number” strategy has failed you because it didn’t consider the other variables that make up a complete system. Folks this is where a more appropriate distribution system that is built around downside risk mitigation systems that can potentially put you in a higher potential for financial success. Heck, who wants to have to go back to work, right?
Here is where a well-designed system will consider all your expected expenses in retirement and then weigh them against guaranteed income sources like Social Security, a pension, and annuities. These lifetime income streams can often cover a substantial portion of your basic expenses, and then you can turn to your other assets to supplement your income needs. This process considers not only your current assets but also things like inflation, your tax obligations, long-term care or other health care expenses, and your legacy wishes, and then identifies ways to cover them over your lifetime.
After a few more beers, I explained to my buddy Ted that the only two things we have control over are risk and process, and I told him to think long and hard about that. While we can’t control the markets any more than we can control the outcome of the next Patriots game, but we can plan for it thoughtfully - without relying on a “magic number” to save the day.
So as always - be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. Insurance offered through its affiliate, CutterInsure, Inc.
We do not offer tax or legal advice. Jeff can be reached at jeff@cutterfinancialgroup.com. This information is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain a better understanding of the subject of the article. Different types of investments involve varying degrees of risk, including the potential for loss. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. Market data and other cited or linked-to content is based on generally available information and is believed to be reliable. Cutter Financial does not guarantee the performance of any investment or the accuracy of the information contained in this article. Cutter Financial will provide all prospective clients with a copy of Cutter Financial’s Form ADV 2A, Appendix 1, applicable Form ADV 2Bs and Form CRS as well as the firm privacy policy. Please contact us to request a free copy via .pdf or hardcopy. 1. https://tinyurl.com/2swpscej
