Do you remember that commercial (https://www.youtube.com/watch?v=cDzUUJSgzyY ) that suggested everyone has a unique “number” that defines their future spend and thus, their savings need? ING put out the commercial in 2008 to help drive home the point of this article – know your number. I loved that commercial because the concept is real for us as planners. The statement that everyone needs $1,000,000 to retire is, well, absurd. Not everyone spends the same. Not everyone lives to the same age. Your retirement will be unique to you so your lump sum need will be too.
We help you do the math. After defining your income needs versus your income resources, the annual gap needs to be filled by your savings. And adding up that gap for every year, as long as you live, is “your number.” But know that this is where things can get tricky. Inflation is a very real risk in retirement, especially when most fixed income sources such as Social Security and pensions do not have cost-of-living adjustments. Don’t fall into the trap of doing the simple napkin math. Don’t fall for simple online calculators that don’t consider:
- Changes in living expenses for your lifetime – the further away the expenses, the more margin for error we suggest.
- Different inflation rates on different expenses – Inflation on a gallon of milk may be 2.5% vs. healthcare may be 6.5%. Consider this. The real-life affect of inflation calculations can be hundreds of thousands of dollars.
- Changes in rates of return – performance on investments could vary greatly year over year. That’s the danger with calculator math illustrating straight returns. A 10% loss requires an 11.11% rate of return the following year to break even. The law of compounding dollars and the sequence of returns, matter greatly to your long-term plan.
- Rate of withdrawal– be cautious about withdrawal rate from savings. Trust the numbers geeks (like me) that have done extensive research over time to suggests a 4.0% to 4.5% withdrawal rate from savings to be safe. (Link: http://www.haasfinancialgroup.com/blog/6-key-risks-retirement-part-ii). Also recognize that if you eat the geese that are laying your golden eggs early in retirement, you forgo the eggs that goose might have produced later in life.
- Consider taxes – taking $100,000 out of an IRA does not yield the same after-tax cash flow as taking $100,000 out of an after-tax bank account. So not all lump sum savings needs are equal.
- Your uncertainty bucket – whatever you calculate as your lump sum need, add a buffer. Other unexpected events can happen over your 8,000 days of retirement and you should try to be prepared.
We use more sophisticated planning tools to help us assess your personal information. We’ll help you make appropriate assumptions on items that can’t be defined. In the end, we should be able to identify what a ballpark lump sum of savings you will need on the day that you retire to meet your needs wants and wishes over time. Again, the process is simple, even if the calculation is not easy. But know your number.
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6 Key Risks to Retirement Part II: Tracking #1-356292
Securities offered through LPL Financial, Member FINRA and SIPC. Investment advice offered through U.S. Financial Advisors, a registered investment advisor. U.S. Financial Advisors and Haas Financial Group are separate entities from LPL Financial.