“Someone told me this is how much I needed;” this is the common reply I get from clientele when first discussing their “retirement savings magic number,” which they believe they need to have in savings, assets, investments, and other equities to live comfortably through retirement. The range of numbers/percentages I hear from different people is quite remarkable. I’m not talking about a range relative to what they earn; I’m talking about what the “magic number” is on a sliding scale, regardless of income bracket; this leads me to conclude that planning for retirement and coming up with a retirement savings number is one of the most misconstrued facets of DIY financial planning.
I wanted to write a piece to address this because of all the inaccurate noise, scuttlebutt, and hot takes out there; as a family financial planner, I notice the most about identifying an accurate magic number regarding retirement savings.
Let’s discuss some of the most common misunderstandings I hear and how you can become optimized through professional help and avoid DIY pitfalls, opportunity costs, and time-wasting strategies.
Common Mistakes Made Trying to Discover a Retirement Savings Magic Number
- Combining All Opinions Into One Action
As I said, there are so many differing opinions on retirement planning and goals; it’s absurd. From clear-cut and dry savings percentages to investment strategies to just plain weird and absurd beliefs, when I first talk numbers with clients, they take a little bit of each (some plan A here, a dash of plan C here) and combine them into their retirement strategy. Most of the time, this would not be advised; this is what I would call the Google-assisted/AI way of going about financial planning. You can find whatever answer you want and confirm biases, but it may not be the most relevant information you need!
- Fixated on Sourcing a Final, Magic Number
Instead of looking at a range of numbers and variables to work with in forecasting financial goals, people become fixated on hitting an exact number to shoot for. They’ll ignore the possibility of working within a range because having the certainty/finality of a goal number matters more than the information contributing to its feasibility.
There are so many variables you do not know the answers to – inflation, the stock market, lifespan, health, etc.- that is why you create a foundational plan and update it as life progresses, not irrationally follow it regardless of life changes.
- Overinflating Numbers
It’s common to have a bias towards certain numbers regarding retirement planning. We tend to focus on the numbers that support our strategy and downplay those that don’t. For instance, many people assume that the high returns seen in the stock market in the past will continue indefinitely or that they can consistently achieve a certain rate of growth; this is a recipe for unrealistic expectations about the growth of their savings over time.
For example, if someone expects an annual return of 8% based on past stock market performance, they may believe that saving $500,000 by retirement will grow to over $1 million within ten years. However, market conditions change, and returns can vary. Suddenly, someone is short of their magic number by a few hundred thousand dollars, believing that market conditions are constant.
I call the five years before and after retirement the retirement red zone. Moving between the 20s is easy, but as all football fans know, a mistake in the red zone is the difference between winning and losing. Retiring with a portfolio that does not consider this is the biggest retirement mistake I see. If you draw a portfolio during a down market, it is very hard to recover. Learn more about this from my 3-Bucket Strategy.
- Underinflating Numbers
This is a big one. When I ask clients to calculate how they came to their retirement savings magic number, they often neglect what the cost of living will be like in retirement, ignoring expenses and basic needs; this happens for the same reasons people overestimate numbers: it’s a bias that fits our desired narratives.
Many assume their expenses will drastically decrease once they retire, believing they won’t need to spend as much without work-related costs and that their kids will be adults and no longer need financial assistance. Here’s the big takeaway: people will ignore how their lifestyle may change in retirement in favor of how they’d like it to change.
For example, retirees may want to travel more, pursue hobbies (golfing, sailing, etc), or dine out more. However, unexpected expenses can and do arise, like home repairs or helping adult children financially.
Here’s the reality: There are different stages of retirement, and they’re not all the same. During the honeymoon phase, you should take advantage of good health and travel. Understanding these things won’t be as easy as you age. You should also save and anticipate for eldercare expenses later on in retirement.
- Ignoring the Opportunity Costs DIY Financial Planning
Perhaps the most significant retirement planning mistake I try to help people avoid is wasting time and energy trying to be self-optimized. The amount of time wasted and the opportunity costs needed just to be OK with a DIY retirement plan instead of seeking professional help and guidance are just not worth it to most once they realize what it takes.
Don’t Guess Your Magic Number, Let’s Discover It
I’ve been in family financial planning in the Greater Boston area for decades. Discovering your magic retirement number isn’t about guesswork, online forums, click-bait apps, and hoping things fall into place. It’s about creating a clear strategy rooted in solid data personalized to your unique lifestyle, goals, and financial situation.
I’ve helped many families map out their future, guiding them to a retirement plan beyond just a number. I’m here to save you from the stress and uncertainty of trying to figure it all out independently. Believe me, I know many who wish they had never walked down that road in the first place!
If you have questions about your magic retirement number, please book a meeting; my door is always open.
