Why A Retirement ‘magic Number’ May Be The Wrong Target

Americans have no shortage of retirement benchmarks competing for their attention. Some experts say you need $1 million, others suggest saving 10 times your salary, and then there's the 4% rule.

On top of that, there are annual surveys and statistics that aim to calculate or identify the ever-popular retirement "magic number" for how much the average American needs to retire comfortably.

While these figures and rules can offer a starting point, they can also create unnecessary anxiety and lead people to focus on the wrong end goal.

Retirement planning is not about reaching someone else's number. It's about creating enough sustainable, reliable income to support the life you want to live.

Start with the retirement you envision

Many people begin retirement planning by asking, "How much do I need to save?" However, a more useful question may be, "What do I want retirement to look like?"

For some, retirement means extensive travel and new experiences. For others, it may involve staying close to family and supporting children or grandchildren. Others might even consider relocating, volunteering, pursuing a passion project or continuing to work in some capacity.

Those decisions matter because they determine the amount of income you will actually need. A retirement built around international travel will look very different financially from one centered on spending time at home with family.

Starting with your goals rather than a savings target helps turn retirement planning from a math exercise into a strategy built around your life.

Focus on income, not just assets

During your working years, retirement planning is largely about accumulation. You save, invest and allow time and compounding to work on your behalf.

As retirement approaches, the challenge changes. The question is no longer how much you can accumulate. It becomes how effectively you can convert those assets into reliable income.

This is where popular rules of thumb can fall short. Let's take the 4% rule, for example. This strategy suggests withdrawing 4% of your savings in the first year and then adjusting that amount for inflation every year after.

While this can feel simple and may work for some, there is a lot it can't account for, including when you retire, your tax situation, spending patterns, desire to leave assets to heirs or charitable causes, among other factors.

Two retirees with identical portfolio balances could require very different withdrawal strategies based on their goals, other income sources and life circumstances.

Consider the personal risks, too

A retirement income strategy should also account for risks that a simple savings target can't capture.

Longevity is one example. Funding a retirement that lasts 20 years is very different from funding one that lasts 35 years.

Market conditions matter as well. Retiring into a market downturn can create challenges that don't exist when markets are rising, particularly if withdrawals begin immediately.

Inflation can reduce purchasing power over time, while taxes can significantly affect how much spendable income remains from different accounts.

Family considerations also play a major role. While some retirees expect to help support aging parents, others may want to assist adult children, fund education for grandchildren, or prepare for a future transfer of wealth.

These priorities are meaningful, but they're difficult to capture in a single benchmark or national average.

Build a plan that evolves

No matter what you envision for your retirement, planning for it shouldn't be a one-time exercise completed just before leaving the workforce. A strong retirement income strategy should be flexible enough to adapt as life and goals evolve.

That's where an adviser can add value. Working with an adviser can help you build and refine that strategy over time, aligning your resources with your goals, revaluating trade-offs and adjusting as circumstances change.

A retirement plan should reflect your life, not a "magic number" or arbitrary benchmark. In the end, what matters most is having a personalized income strategy that supports the retirement you want today and can evolve with you tomorrow.

This material is provided for informational purposes only and is not intended as investment, legal, or tax advice. Any opinions expressed are those of the author as of the date of publication and are subject to change. Individuals should consult their own legal, tax and financial professionals regarding their specific circumstances.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.