Retirement: What's your magic number?

By Walter Updegrave, senior editor


(Money Magazine) -- Question: Everyone talks about 'the number,' but what does it tell you? -- ROBERT C., Los Gatos, Calif.

Answer: Ah, the number. Books have been written about it. ING has designed an entire ad campaign around it. And an assortment of online calculators will help you figure out yours -- that is, the savings you'll need to amass by the end of your career to generate enough income beyond Social Security and pensions to retire comfortably.

walter_updegrave__2009b.03.jpg
Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

But while the obsession with this figure is somewhat useful -- it is good, after all, to have a goal -- there are better ways to determine if you're making progress toward a secure retirement.

To arrive at the number, you estimate how much income you'll need to maintain your standard of living after you retire -- and how long that income must last. So the number for a 55-year-old who earns $150,000 a year, plans to retire at 65 on 80% of his salary, and wants that income to last until age 95 would be $3,136,687, according to ingyournumber.com.

A moving target

But for all the apparent precision, your number is really an estimate -- and a squishy one at that. Your actual target could be much lower if you pay off your mortgage before retiring and your expenses drop significantly. Or it could be higher if you plan to travel a lot in retirement or if you run up steep health care costs. Other factors that will skew your bogey: your investment gains, how long you live, when you retire, and whether you work part-time after retiring.

The further you are from retiring, the more unknowables you face and the bigger the grain of salt you must factor into any estimate. So while it's useful to monitor your progress, your main concern, especially early in your career, should really be saving all you can. As you get older, and as some variables come into sharper focus -- like your health, your intended retirement age, and your projected peak salary -- then it may become easier to settle on a realistic numerical goal.

A better alternative

But your question raises a larger issue: Does it make sense to shoot for a big lump sum? A huge six- or seven-digit target can be intimidating. Besides, many people have a hard time wrapping their minds around big numbers. Behavioral economists warn of "wealth illusion," or the tendency for people to overestimate the sustainable income a large pile of money can generate.

That's why many retirement experts believe, as I do, that you're better off focusing on how much income you'll need -- and whether you're on track to get it. Yes, that's an estimate too, but one you can more easily equate with a lifestyle.

Some 401(k) plans are already helping workers make this shift. Putnam has introduced a Lifetime Income Analysis Tool that allows participants to see how much annual income they're projected to get from their current 401(k) balances, future contributions, company matches, and Social Security -- and how tweaking their contribution rate, retirement age, and stock/bond mix could get them closer to their goal.

You can run similar figures using the Retirement Income Calculator at troweprice.com. While you may learn that you're a bit short of your income target, being a few thousand dollars off that will be less daunting than learning that you're a quarter million shy of your number.  To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.28%4.41%
15 yr fixed3.30%3.33%
5/1 ARM3.30%3.34%
30 yr refi4.31%4.39%
15 yr refi3.35%3.31%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 16,463.58 -38.07 -0.23%
Nasdaq 4,114.82 -12.15 -0.29%
S&P 500 1,873.09 -2.30 -0.12%
Treasuries 2.69 0.00 0.07%
Data as of 10:07am ET
Company Price Change % Change
Facebook Inc 60.81 -0.55 -0.90%
Bank of America Corp... 16.29 -0.08 -0.49%
Apple Inc 562.84 38.09 7.26%
Verizon Communicatio... 46.73 -0.70 -1.48%
General Motors Co 34.80 0.41 1.19%
Data as of 9:52am ET

Sections

Billionaire advocates for increasing a tax credit on wages as a way to attack the growing inequality in the U.S., but he's unsure of the benefits of raising the federal minimum wage. More

Apple increased its buyback and posted a strong second quarter, sending shares soaring. More

Schwinn, Trek and Cannondale are all iconic American bicycle brands. But none of them are made in the United States. More

When you are just starting out or finally starting to get serious about saving, the basics will get you far. Here are more than a dozen tips that will help you lay the base for building your net worth. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.