Before we discuss the three items, we’d like to be clear about something first and foremost—there’s nothing really “magic” about a “magic number.” Many investors place a lot of focus on setting a “magic number” (the amount of assets that, in theory, gives a person the ability to retire while maintaining the same standard of living and meeting all of their needs) and reaching it, but it’s important to understand that reaching that number in and of itself doesn’t solve every retirement income need.
An investor has to constantly assess their asset levels relative to their needs throughout retirement.
3 Important Factors to Determining a Retirement Nest Egg Target
1) Be Conservative When Establishing Your Life Expectancy
According to the Social Security Administration, a man reaching 65 today can expect to live, on average, until age 84. For a woman, that number is 86. But those are just averages—about one in every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.
Part of knowing how much to save for retirement involves knowing how long you need those assets to last for you and your family. If you plan to live longer and save with that in mind, you give yourself a better chance of accumulating a sufficient amount of assets.
To calculate a life expectancy using a Social Security Administration calculator, click here.
2) Be Detailed When Estimating Living Expenses in Retirement
We’ve created a list to help you estimate your living expenses, which you can find here. A financial advisor can help you forecast increases to your expenses (inflation, rising cost of healthcare, etc…) over the years so you can factor them accordingly into your investment plan. It’s also important to include some “shocks” here and there, which are bigger one-time expenses that come from emergencies or unexpected events. This helps you create a buffer.
3) Explore How Spending in Retirement Affects Your Assets
You’ll likely need some help for this one, and a financial advisor should be able to assist. With a certain type of software, you can calculate how spending patterns over the years will affect your level of assets. It’s a two part process—on one side, you calculate a rate of return on your assets, and on the other, you apply living expenses such that you factor the two at the same time. You can tinker with the program to estimate best and worst case scenarios, and everything in between.
This exercise will help you get a better idea of how much you need to save, what rate of return you want to shoot for (giving your insight into how to invest your portfolio), and how spending habits affect your level of assets over time.
Ask a Financial Advisor for Help in Calculating Your “Magic Number”
As a person’s needs change, as returns on investments change year over year, and as other factors like inflation and living expenses fluctuate, the “magic number” will also change. In our view, it’s important that a person use an investment plan and the help of a financial advisor to conduct regular checkups on their financial balance sheet and portfolio, to ensure they remain on track.
Our Wealth Managers can help guide you on the three points above as well as help you create an investment plan to chart where you stand. Give us a call today at 1-800-541-7774 to get started, or click here.
