Tuesday, March 15, 2011

There is no magic number


Everyone talks about "the number" you need to retire.  In this message we explain why it is more important to focus on the cash you need than any specific asset number.

Everyone talks about "the number" -  you know:  the amount that you need to save by retirement so that you can have the lifestyle you want.  Brokerage financial models specialize in this:  you plug in a bunch of assumptions that may or may not be right and out 'pops' the 'right' number.

But the 'the number' is based upon many long term assumptions - guesses, really, that may or may not be right.  Some of these assumptions you have no control over, such as what investment returns or health costs will be.  Others are much more controlled by you such as when you choose to retire or where and how lavishly you live.  Change any of these assumptions and the 'magic' number changes - often by quite a bit.

The other problem with the 'magic' number is that it tends to push us towards more risk:  after all, if you can't save any more then the obvious way to achieve 'the number' is to get a higher rate of return which means more risk.  But it makes no sense to take more risk than your circumstances allow just to hit a number that is not much more than a guess.

We believe that you should focus not on a single asset number but on the amount of cash income you need to have at any given time.  The value of your portfolio will fluctuate as markets wax and wane so it's critical to keep focused on what you actually need to live:  income.

And taking more risk than is appropriate is the last thing you should do as you plan your retirement.  If you're concerned about having enough money, change the variables that you control.  Variables like how much you save, when you retire, where you live or whether you have a part time job.  These things are under your control and you can change them far easier than you can change your market rate of return.

Don't let 'magic numbers' dominate your retirement planning - focus on the cash you need and the things that you can control.

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