The Wrong Question
One of the most asked retirement questions I receive is, "How much do I need for retirement?" Is it one million dollars, five million dollars or some other number? What exactly is the magic number? Well, according to Fidelity Investments the number is eight! A Fidelity study suggests that you need 8x your current annual salary to be on track for retirement.
Now is 8x really enough? Fidelity assumes that your investments will grow at a 5.5% annual return. T.Rowe Price factors in more volatility and recommends 12.5x your salary to be saved by age 65. What Fidelity and others are suggesting is far too generic. What if there is another market crash when you’re nearing retirement? Or you were planning to work until age 65 but suddenly got sick or needed to be home to take care of a loved one?
The Right Question
The main question you should be asking is, "How much income do I need to be able to retire?" Think about it this way, if you were saving $100,000 for your kid’s college education fund and you reached that goal, would you risk losing that money to a stock market crash? No! You’d be sure to lock in that number and move your money to a conservative investment vehicle. With retirement income planning the majority of people don’t think about it the same way.
So start by asking the right question, how much do I need to retire?, to ensure you get the right answer for you and your situation. If your goal in retirement is to have say $6,000 a month of income, then that’s the number you should work towards. This is a guaranteed income number that pays you (call it a paycheck) every month whether the stock market is up or down. If you’re still saving for retirement, you need to work backwards from that number. If you’re in retirement, you need to look at your current assets and other income sources to determine how you can get to your monthly number without adding on significant risk to your portfolio.
In our wealth management XLT sessions, students are taught to ask the right questions, in this case, how much do I need to retire? That way they get the answer that’s right for their individual circumstances and retirement needs. We teach them strategies for creating their own personalized pension plan to meet their retirement needs.
About the Author
Merlin Rothfeld has been actively involved in the financial markets since 1996. After receiving his degree in Business Finance, Merlin worked for a large financial planning firm in California where he applied traditional, long term investment strategies.