The Problem with Your 'Magic' Retirement Number

It is fashionable in the community of retirement advice-givers to talk about your “magic number” for retirement. That’s the amount of money you should accumulate by the time you retire so that your savings will last the rest of your life, or some fixed period, like your projected life expectancy.

This magic number is based on a number of assumptions, including your achieving certain average investment results over the long term. And perhaps that will work out. The stock market in which your savings are invested might hit the average return of the past several decades. And you might not live longer than average.

Planning for averages

Or maybe it won’t work. It is disconcerting to plan for “average” when you realize how average might work to your disadvantage.

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Take this example: A small pond could average 3 feet in depth. You might plan to walk from one side to the other. You enter the water at the sandy beach, where the depth averages just a few inches. You take several steps toward the center of the pond with no problem. In fact, you can walk for another several yards without the water level rising to your knees. Then, the bottom starts to drop away. You find that as you approach the center of the pond, it is much deeper than 3 feet there, and as you keep walking you will be in over your head.

If you are wearing a flotation device, or you are confident in your swimming skills, you will make it to the other shore. Otherwise, in this pond of 3 feet average depth, you could drown.

Add guaranteed lifetime income to your retirement

Your goal, as always, is to develop enough income in retirement so that you don’t outlive your money. It is fine to put some of your savings into the market, with the hope that averages will climb higher than they have been for the past few years. If you develop a plan to create guaranteed lifetime income with a portion of your money, however, you may not have to depend on the market.

Social Security and pensions are the main sources of guaranteed income for many retirees. The other main way to create another source of guaranteed monthly payments is with the purchase of income annuities, which shift the risk of living beyond your average life expectancy, or the risk of below-market returns, to the insurance company backing the annuity.

Income annuities allow you to plan for all the stages of retirement: Early retirement, when you are looking to travel, babysit the grandkids and volunteer, followed by later in retirement when you might anticipate increased medical expenses and wish to stay in your home and avoid becoming a burden on your children.

To avoid the equivalent of drowning during retirement, forget the magic number based on averages. Instead, take control of your future by determining what income your savings will produce. That requires creating a guaranteed lifetime income strategy — your flotation device — unique to you.