Let me tell you about two conversations I had in the past year or so with different experts in retirement planning.
The earlier one, which took place last year, was with the syndicated columnist Humberto Cruz, whose articles appear in over 100 newspapers across the country, including the Boston Globe. We were talking on the phone, and he said he had gotten a letter from a reader asking if $500,000 was enough money to retire on. He was curious what I would respond to such an inquiry. I told him that in the absence of a lot more information, all I felt I could say is, “It depends.” He seemed to agree.
The second conversation was with a marketing manager at one of the large financial companies whose ads you might have seen on TV. The ads, which I believe have been taken off the air by now, showed various people of working age going about their business, but each with a dollar figure floating above his or her head, and the ad asks the question, “What’s your number?” That is, how much money do YOU need in order to retire as you would wish? This is a more sensible question than the one Humberto Cruz’s reader asked, since it recognizes that each of us has different financial needs. But even so, the product manager admitted to me that he was horribly embarrassed by these ads, which he said came out of the advertising department, without any input from him. (In yet a third conversation, someone from a competing company recently told me that at the national conference for his own firm, their leading sales people were making great sport of these ads.)
What’s wrong about both these questions is the assumption that there is some specific amount of money you need to have in order to live the lifestyle you wish to live during your retirement, without running out of money before you die.
In one sense, that assumption is valid. If you waited until the last hour of your life, knowing both how long your life had been and what had happened along the way, you theoretically could calculate how much you needed to have had back when you retired.
You can’t do that calculation ahead of time, though, because you actually know neither how long your life will be, nor what will happen during all those years. And without that knowledge, you cannot know how much money is necessary.
There is another reason that any attempts to calculate “your number” are misguided, which is that within a pretty wide range, we can adapt to having more money at our disposal, or less. It’s easier, of course, to adapt to having more. But people usually underestimate how easy it can be adapt to having less. There is typically a mildly painful and depressing period of transition when we have to let go of some of what we are accustomed to, but then we often find that a somewhat simpler life is both less stressful and more attuned to the things that truly matter in life.
If you are still quite a few years away from retirement, you do not need to calculate your “number” – and if you do calculate it, using any of the free software that’s out there for the purpose, you should not take the results seriously. What you should do instead is save as much money as you reasonably can, preferably to the point where it hurts a little (also keeping in mind that paying off debt, especially high-interest debt, is a valid and very potent form of “saving”).
Saving until it pinches a bit helps you in two ways. First, obviously, it provides financial resources you can use later on, either to supplement your regular income when you retire, or to serve as a source of funds to help you deal with random adversities. Second, to the extent you get used to living on a little less, you will find it easy to continue doing so when you do retire, and so you will need less income and savings than you otherwise would. You have more, and you need less. You win on both ends.
If you are retiring within the next few years, and especially if you are retiring imminently, the implications of not having a “retirement number” are different. Your task here is actually more difficult. There is no point even trying to find “the number” that your lifestyle demands, since it is now too late to achieve that number, whatever it might be. Instead, you need to do the opposite: find the lifestyle that your financial resources will support. And this requires detailed and difficult analysis that takes into account not only your ongoing expenses, but how your financial situation could change in the coming decades both in ways that are reasonable predictable and in ways that are not predictable but are distinctly possible.
If the lifestyle that your financial means permit is not acceptable to you, then you will need to postpone retirement. But at least you will learn this while you are still able to work for a reasonable amount of pay, instead of finding out five or ten years down the road when, after having been retired for that amount of time, it would be very hard if not impossible to find new sources of income.
If (or when) you have been retired for a while, this same kind of analysis is still needed. Ideally, in fact, you should do it at least once a year, because things change. You might have had extra expenses (or perhaps received some unexpected windfall), the economy might be better or worse, your health might have changed – and even if nothing else changes, you are a year older, and so your life expectancy has actually increased slightly. Also, at higher ages, some financial products make more sense, or less sense. For example, the purchase of lifetime annuities typically pays off better in your seventies, if you are still healthy, than it does in your sixties or eighties.
But mostly, if you re-analyze your financial situation every year during retirement, you will not wake up one day and find that you have unexpectedly fallen into an untenable position. Having that happen is painful at any age, and it happens to a lot of people. Young people usually still have decent options for working their way out of such a spot, though, while older, retired people rarely have such options. So extra care is required in retirement.
While one lesson here is to be wary of anyone who suggests that your future is somehow tied to a particular number, the more important lesson is that financial numbers still do matter, more and more so as you approach retirement, enter into it, and then continue to live through it.
Chuck Yanikoski is a retirement adviser who lives and works in Harvard. For more about him, visit www.ChuckYRetirement.com.