Google ‘How much money do I need to retire?’ and you’ll see that among the various calculators, theories, ‘magic numbers’ and rules of thumb listed in the search returns, the ideas about what retirement savings should look like vary quite substantially.
Mathematically, coming up with a number is not too difficult.
Coming up with a number that will serve you well is another matter altogether, so unfortunately, the answer to the question is up there with the answer to “How long is a piece of string?”
I couldn’t find an answer on Google for that one, but smart-arse Siri came up with “Twice the length of the centre to one end.” I’m going to start using that response myself.
You see, when it comes to planning your finances, it is no different to planning most other aspects of your life – there are many known and unknown variables to consider, but this is where the skill and on-going guidance of a good financial planning expert could be of great value.
Remember that financial planning is not a product – it’s a process and one that needs to be adapted and reviewed regularly according not only to your current financial situation, but also to what you know is going to happen in the future (e.g. your kids will be starting college in 5 years’ time), what you think could happen in the future (e.g. a promotion, a change of location) and also make contingencies for the unplanned events, i.e. the ones that you don’t know will happen in the future, which are not always bad things like divorce or death, but could include unexpected windfalls or career opportunities. In any case, assumptions need to be made and broad ranges set.
“ . . . there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know.”
~ Donald Rumsfeld
I actually think Donald was just avoiding the question when he said that, but it kind of makes sense – after a couple of glasses of wine, at least.
Many ‘financial advisers’ will really use an emotional sell (a technique known as ‘creating disturbance’) to push their products on you. For example:
“If you don’t start saving today, you’re going to be living on the streets when you retire.”
“What if you can’t afford to send Little Johnny to that expensive Ivy League college? How will that make you feeeeeel? Doesn’t your child deserve the best opportunities in life?”
Oh, give me a break!
I know it’s all part of selling, but be warned that if it’s coming out of the mouth of a commission-based adviser, it’s being said to make the sale, not so that you secure your financial future.
Sure, we all need a kick up the backside sometimes, but it is you that needs to decide your priorities and act accordingly. Financial Advisers should be there to advise you on the appropriate actions and the best and most suitable financial planning tools for you at the time.
Anyone who has ever been involved in sales knows that the majority of prospects buy for emotional reasons, not logical ones and that is the road a financial product salesman will always try to take you down.
But when it comes to your finances, I urge you as a buyer not to discount the logical side. Also, just because a salesman manages to identify a need or a shortfall in your financial planning, doesn’t mean that they will recommend the appropriate product. For more on this see the following posts:
The bottom line: how much you need to retire depends, but for want of a definitive number, save as much as you can whenever you can.
- Speak to a financial planning expert (preferably a fee-only adviser)
- Use cost-effective, flexible and accessible investment and savings tools
- Start as early as you can on your own terms
The world has changed in that more and more people are working beyond the standard retirement age, either through choice or necessity, but there is a difference between wanting to work and having to work. There are also many more ways of earning money from home – it’s not like people need to “go down t’pit” in their sixties and seventies.
When you do decide to stop doing any form of paid work, however, managing your retirement income stream (or streams) is a different ball game, since you are generally dealing with finite amounts without the luxury of new money coming into play from employment
You can often make a choice about whether you save or spend, but when you are retired and effectively no longer earning a regular income, a lot of options are taken off the table – the pot you have is what you have to work with from which to create an income.
A simplistic way to look at things is to start with an imaginary scenario today, where you have no mortgage and no dependents to support and ask yourself, how much monthly income would I need for a comfortable life today?
More questions than answers, I’m afraid.
To a degree, we can come up with a number based on the answers to several questions and by making certain assumptions, but we’re still just guessing really!
- How much annual income do you need or want in retirement?
- What is your projected total savings amount between now and your target retirement date?
- How many years are you expected to live after retirement?
- What rate of return will your investments earn before retirement?
- What rate of return will your investments earn during retirement?
- What is the expected rate of inflation going forward?
- What is your expected Social Security and pension income?
We also need to make certain assumptions about inflation rates and investment returns before and during retirement, life expectancy and health.
Then we need to factor in numbers for desired income and projected expenditure and we can come up with a number. However, over-spending, under-investing, below-expected returns, forced early retirement, medical bills and other unforeseen expenditure can all distort the number.
And so I return to my earlier statement: financial planning is a process, not a product.
Find a good adviser that you trust to help you come up with a strategy that suits you and then review your position regularly.
Feel free to contact me if you want some more pointers.
Read some more great posts on Expat Financial Guy.