I wasn’t going to write on this but I can’t let it go. In fact, I see a post in my inbox this morning about the exact same thing so now I must opine. There was an article on Bloomberg recently that based on a “survey” (Oh Lord…) the majority felt $3M was the number needed for a comfortable retirement.

Here is the article in its entirety.

While I agree it’s OK to have a rough idea and maybe a “goal” in mind, I am 100% opposed to ever trying to nail down a specific number or working to achieve a specific number.

More on that later, so a little context first on the article itself:

• The survey was based on 557 respondents. (Do you really think that number should represent what any type of # is for everyone else? I don’t.)
• The ranges of possible responses started with <$1M and ended with >$20M. (Bar is set a little high, ya think?)
• Less than half felt they would have ultimately saved enough to maintain their current lifestyle in retirement (because they have no idea if any number will be enough)
• At the end of 2022, the average balance at Vanguard sponsored workplace retirement plans had an average balance of $112,572 (there is no mention of average age, but suffice to say that is a long damn way from the magic number of $3M)
• 56% said they were going to stick with their current plan (because they have no idea what if any changes they should make)
• 8% said they were considering working forever (because the magic numbers seem so far away, they obviously do not have a choice).

Be very careful trying to pin a specific magic number to your ability to retire. There are so many factors involved, personally and financially, that doing so is a fool’s errand. No two numbers are the same.

Conventional Retirement Planning

Ah, the classic formula. You participate in company sponsored 401(k) plans at least up to the match, ante up more if possible until you reach the maximum annual contribution. You take advantage of Roth IRA’s if eligible, Health Savings Accounts if offered.

The conventional wisdom is endless accumulation. Head down, stash it, keep grinding.

The idea is at some point in the future, most likely dictated by your age, you leave the workforce behind and begin drawing on that “nest egg” you have worked so dutifully to create.

Of course you can only draw on it so much. If you are wondering how much, great news! The industry has calculated that magic number for everyone too, it’s 4%. The 4% rule.

Idea being regardless of the amount saved, if you only withdraw 4% per year, and assuming your are invested and diversified to earn a decent historical return, you should not run out of money. Fingers crossed.

So what do most people do?

They look at their balances, do some back of the napkin estimations on what they “think” those balances might be some day and see what the 4% gives them.

It is usually not enough…

“We cannot continue to do what we are doing now on 4%, much less do anything we WANT TO DO.”

The want to do is usually travel by the way, the happy couple walking hand in hand on the beach with their white pants rolled up to their knees, shoes in hand while they laugh hysterically in retirement bliss. Some even dance.

I guess they reached their magic number and 4% of that each year is plenty more than enough. Their cup runneth over and they are stress free. Give me a break.

Meanwhile, in the real world, hard working individuals see those numbers (and those pictures) and decide the only way to get there is to work harder for longer and save more. You know what? Maybe just never try to retire in the first place because there is no way I can achieve my magic number.

The biggest danger with endless accumulation?

You may reach the end first.

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What’s Missing

The problem with “the number” and “the 4% rule” is they fail to account for:

Pensions? Granted they are quickly going by the wayside, but many do still exist and many yet to be retirees in both the public and private sectors will be drawing on them.

Social Security? Nah, it won’t be around when I need it. I used to be in that camp, but I am having my doubts. It just seems too deeply imbedded to allow for insolvency. But…given the state of affairs in Washington I guess anything is possible. Bottom line you should at least take a look at what it may provide.

Dividends? If you have invested any excess capital over the years in dividend paying stocks, you may be at a point in the future (if not already) where they are throwing out significant sums of dependable income.

Side Hustle? Know for a fact you will be doing something and pulling in some kind of income on the side in retirement?

Downsize? What if the house payment is traded in for a smaller paid for residence?

None of the above is taken into account when fixating on a magic number and withdrawal rate.

An Alternative Method

Financial Planners are in a position now to offer much more detail using sophisticated tools and modeling. Basic Monte Carlo simulations have been around for a while (just think random possible outcomes, bear markets, etc.). You can even go it alone and use tools like Personal Capital to get a better idea what your future financial status looks like.

Regardless of whether you use a professional or decide to go it alone, take the time now to calculate your Solvency.

That starts with creating a detailed Spending Plan.

Most people would rather go to the dentist, I get it, but it doesn’t have to be so intimidating. The reason most go without is they feel they are required to track every single dime they spend. Not true. Large buckets and categories can be just as effective if you take the time to make them as accurate as possible.

The next step is to outline your Assets and any future contributions with an expected rate of return. You hear the terminology Asset “Base” for a reason, it helps provide the basis (foundation) for any future planning and spending.

Finally, you should be able to use all of the above to calculate your Solvency and project it forward. Going through this process now, in the present, is the best way to start truly getting a feel for the future.

• What if you were to realize you could actually save less and still make the numbers work? Could that extra income be used to live a better life now?

• What if you were able to pinpoint those one or two expenses that are really holding you back? Can you make any adjustments now to breathe a little easier later?

All of these questions can only be answered when you take a detailed look at the big picture that is 100% tailored to you and only you!

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ON BALANCE

• Retirement is something only you can define. Some people simply love to work and find joy and satisfaction in it. Totally fine! Others may look to downshift but keep working. Others may want to switch gears completely. You decide.
• There is no magic number. There never will be. You are betting on the final score of a game that is still being played. Instead, focus on the process and the plan and if you are unable to do that or not sure where to start, find a professional to help.
• Comparisons are useless. If you are trying to see how you measure up against others, stop now. You may have 10% of their assets and be 90% better off now and the next 90 years.
• Debt is an anchor. Never ending mortgages and car payments keep the middle class in the middle. Very true. As you start to approach and plan for retirement, debt payment becomes even more burdensome and is enemy number one to your cash flow.
• Endless accumulation is futile. Being responsible, saving, investing as much as possible is and always will be the right path. Just make sure to take inventory along the way. Stop and ask yourself if you can truly define when enough is enough. We all only have so much time on the sunny side of earth.

So the next time you see people talking about how much money they need to retire, just take it with a grain of salt.

Chances are they are fixated on a magic number that is most likely irrelevant in the first place.

It’s definitely irrelevant to you.

Visit the ForwardSpend section to learn more about what I use to keep track of my Solvency.