Dear Retirement Calculator, what’s my number?
Human beings like clear answers, especially as it pertains to important questions… like, how much do I need in retirement savings? The financial services industry has armies of marketing teams who have worked hard to deliver answers! Retirement calculators, planning questionnaires, and red/yellow/green-light systems abound! Unfortunately, these are simply marketing ideas, often of the garbage variety. The money-in/money-out retirement calculators play into pre-retirement fears rather than aid decision making in a dynamic world.
There’s no silver bullet/equation to solve the retirement savings question. Any calculation based on known inputs today will still be subject to unknown, and even unlikely, future events. A medical crisis requiring extensive and expensive care, a major home repair after an ice storm…in Texas…., or some other unexpected liability can quickly drain assets. You might even change your mind about when and where to enjoy retirement!! Does this mean you should just seek a higher “number?” Would this push back a scheduled retirement date? One single retirement calculator is not feasible.
Unexpected costs aren’t the only risk to a retirement number. Imagine if your number was a $1 million, and upon reaching that milestone in March of 2020 when the onset of a pandemic caused markets to drop nearly 40% in a matter of weeks! All of a sudden, $1 million of retirement savings was only $600,000. This is what financial nerds (aka Pete) call sequence of return risk, which is essentially expecting to access your investment, in this case retirement funds, at the same time in which the value is impacted by a market decline. If you chase a retirement calculator’s number, you might find the goal line getting moved back along the way.
Another problem with the proverbial retirement number is that not all dollars are equal. In some cases, $1 million in retirement savings does not equal $1 million. Before I lose all credibility as a financial advisor (and kindergarten level mathematician), let me explain. Let’s go back to the example of a $1 million retirement savings number… What if you have $1 million in your IRA, and you’re ready to retire, but you’re only 55???? Any funds taken out of the IRA before age 59.5 are subject to a 10% penalty from the IRS, so those funds are really only worth $900,000 for the next 4.5 years. That doesn’t include the tax bill, either! So, it’s even less! See how I did that?
These are only a few of the litany of problems associated with using a singular retirement calculation or other flat methodology to determine how much retirement savings is needed. To optimize the balance between working longer and retiring earlier, between risk and reward, and between enjoying life today and saving for retirement, a dynamic financial planning process must be employed now and through the retirement years. Art and science must be considered along the way. It’s never too late to start, but starting earlier is definitely advantageous. So, acknowledge that simple answers to complex decisions are inherently flawed, ditch the retirement calculator, and consider partnering with a financial advisor to help your family optimize the retirement planning process!
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