The Problem with Your 'Magic' Retirement Number
Calculating how much to save for a secure retirement has one major flaw: To do the math, you have to rely on averages. The problem? You aren’t average.
It is fashionable in the community of retirement advice-givers to talk about your “magic number” for retirement. That’s the amount of money you should accumulate by the time you retire so that your savings will last the rest of your life, or some fixed period, like your projected life expectancy.
This magic number is based on a number of assumptions, including your achieving certain average investment results over the long term. And perhaps that will work out. The stock market in which your savings are invested might hit the average return of the past several decades. And you might not live longer than average.
Planning for averages
Or maybe it won’t work. It is disconcerting to plan for “average” when you realize how average might work to your disadvantage.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Take this example: A small pond could average 3 feet in depth. You might plan to walk from one side to the other. You enter the water at the sandy beach, where the depth averages just a few inches. You take several steps toward the center of the pond with no problem. In fact, you can walk for another several yards without the water level rising to your knees. Then, the bottom starts to drop away. You find that as you approach the center of the pond, it is much deeper than 3 feet there, and as you keep walking you will be in over your head.
If you are wearing a flotation device, or you are confident in your swimming skills, you will make it to the other shore. Otherwise, in this pond of 3 feet average depth, you could drown.
Add guaranteed lifetime income to your retirement
Your goal, as always, is to develop enough income in retirement so that you don’t outlive your money. It is fine to put some of your savings into the market, with the hope that averages will climb higher than they have been for the past few years. If you develop a plan to create guaranteed lifetime income with a portion of your money, however, you may not have to depend on the market.
Social Security and pensions are the main sources of guaranteed income for many retirees. The other main way to create another source of guaranteed monthly payments is with the purchase of income annuities, which shift the risk of living beyond your average life expectancy, or the risk of below-market returns, to the insurance company backing the annuity.
Income annuities allow you to plan for all the stages of retirement: Early retirement, when you are looking to travel, babysit the grandkids and volunteer, followed by later in retirement when you might anticipate increased medical expenses and wish to stay in your home and avoid becoming a burden on your children.
To avoid the equivalent of drowning during retirement, forget the magic number based on averages. Instead, take control of your future by determining what income your savings will produce. That requires creating a guaranteed lifetime income strategy — your flotation device — unique to you.
-
Stocks Recover from Massive Morning Drop: Stock Market TodayStocks hit their session lows early Monday in reaction to U.S. airstrikes on Iran, but quickly bounced.
-
Netflix Is Dropping Support for Older Devices — Is Yours One of Them?Some smart TVs and streaming devices are already losing access. Here’s how to check and what to do next.
-
I'm a Retirement Editor: Here's the Investing Advice I Gave My SonAs a veteran retirement investor, I'm sharing this advice for your own adult children or grandchildren.
-
Are You Honest With Your Financial Adviser? Why Hiding the Truth Can Cost YouHiding assets or debt from a financial adviser damages the relationship as well as your finances. If you're not being fully transparent, it's time to ask why.
-
5 Actions to Set Up Your Business With Your Exit in Mind, From a Wealth AdviserWhen you're starting a business, it may seem counterintuitive to begin with exit planning. But preparing will put you on a more secure footing in the long run.
-
Missed Your RMD? 4 Ways to Avoid Doing That Again (and Skip the IRS Penalties), From a Financial PlannerIf you miss your RMDs, you could face a hefty fine. Here are four ways to stay on top of your payments — and on the right side of the IRS.
-
What Really Happens in the First 30 Days After Someone Dies (and Where Families Get Stuck)The administrative requirements following a death move quickly. This is how to ensure your loved ones won't be plunged into chaos during a time of distress.
-
AI-Powered Investing in 2026: How Algorithms Will Shape Your PortfolioAI is becoming a standard investing tool, as it helps cut through the noise, personalize portfolios and manage risk. That said, human oversight remains essential. Here's how it all works.
-
A Newly Retired Couple With a Portfolio Full of Winners Faced a $50,000 Tax Bill: This Is the Strategy That Helped Save ThemLarge unrealized capital gains can create a serious tax headache for retirees with a successful portfolio. A tax-aware long-short strategy can help.
-
5 Retirement Myths to Leave Behind (and How to Start Planning for the Reality)Separating facts from fiction is an important first step toward building a retirement plan that's grounded in reality and not based on incorrect assumptions.
-
I'm a Financial Adviser: Silence Is Golden, But It Hurts Your Heirs More Than You ThinkTalking to heirs about transferring wealth can be overwhelming, but avoiding it now can lead to conflict later. Here's how to start sharing your plans.
