A question often asked during a retirement planning meeting is: What is our retirement savings magic number so we can retire comfortably? Let’s discuss how you can determine your magic number amidst the landscape of personal finances and economic uncertainties.
What is the “magic number” for retirement savings?
The magic number is the theoretical pot of money we believe we need to save to live comfortably and securely in our golden years. But, as with most topics regarding finances, your magic number is unique to you and your personal situation. There is no one right number and it will be different for everyone. It is a starting point, guiding us towards a path of financial awareness and prudent decision-making.
Let’s begin with a quick example. Let’s say you’re going to need one hundred thousand dollars a year during retirement to live the lifestyle you’re accustomed to. While your sister mentioned that she only needs about fifty thousand a year. In this case, your magic number is going to be twice as much as your sister.
Determining your magic number for retirement savings
In simple terms, you need to decide how much money you’ll need to cover expenses on an annual basis during retirement. Unfortunately, it’s not easy to come up with this amount. Why? As we’ve discussed previously, most people don’t track their expenses so you may not even know how much you spend in a year. While you don’t need to know precisely how much you spend annually, you do need a ball park figure. This number helps model your standard of living and how you want to live.
Next you can work with an expert to use a model to come up with the number. You’ll consider key variables such as the ones outlined below.
Other sources of income
It’s important to consider monthly income from other sources. Specifically, do you have a part-time job? Will you receive social security? Do you have a pension? What do you expect from future rates of return on your investment portfolio? If you expect high rates, the less money you’ll need and vice-versa. As you can see, the answers to these questions are important data points to take into account.
Inflation
When forecasting your magic number, think about inflation. The higher the expected inflation rate is, the more money you’ll need. If you think there’ll be a five percent inflation rate on an annualized basis, your pot of money needs to be larger than someone who assumes three percent.
Longevity
While no one can predict how long we’re going to live, there are some indicators to consider. Are you sick? If so, you may not be around very long and won’t need a lot of money. But if you’re in great health and your relatives on both sides of the family have lived long lives, then you should expect to live a long life, too. Therefore, your pot of money is going to need to be larger.
Lifestyle questions to consider
After reviewing the key variables, it is essential to consider factors such as lifestyle expectations, healthcare expenses, inflation, and unforeseen events that may impact our financial well-being. Do you want a buffer for travel, for donating to your favorite charity, for leaving significant money to the kids, etc. The answers to these questions will also provide input to determining your magic number. Once you have these important data points, you can use models to come up with your number.
Do you know your magic number?
Finally, remember it’s not an exact science. While it serves as a useful benchmark, it is not the sole determinant of a financially secure retirement. The journey towards a comfortable retirement involves a multi-faceted approach that encompasses careful planning, diligent saving, and a comprehensive understanding of one’s individual circumstances and goals. Embrace the challenge and seek professional advice to ensure a fulfilling and prosperous retirement.
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