The internet abounds with retirement calculators that will help you estimate the size of the nest egg you’ll need so that you don’t outlive your retirement savings. It makes sense. Business gurus tell us you can’t improve what you don’t measure.
We set other measurable goals in our lives so what’s the problem with aiming for, say, $5 million in savings by age 65? It sets us up for complacency, says Vicki Bogan, associate professor of economics at Cornell University in Ithaca, N.Y. “Anchoring on a specific number — and saying once you get [to] that number you’re done — is not the best idea,” she says. “The calculation of that number is predicated on a lot of assumptions.”
Experts generally recommend having enough savings to generate about 80% of your preretirement income annually, after factoring in what you’ll get from Social Security and any defined benefit pension. You’ll need a larger amount if inflation increases, the stock market falters or your health care costs rise more than expected. Your savings goals can be scaled back if you move to a less expensive area or if inflation stays low.
Right now, a booming stock market is convincing people to retire early because they’ve already hit “the number,” says Allison Schrager, senior fellow at the Manhattan Institute. “I can’t blame them. The retirement industry has been really negligent in getting people overly focused on that number.”
Meanwhile, that obsession has done nothing to improve retirement security. Only 36% of current retirees say they saved the right amount, compared with 45% who believe they saved too little and 18% who saved more than necessary, according to a 2020 survey by the Employee Benefit Research Institute.
Although having a retirement savings number is important, it’s also a moving target and fixating on one number runs the risk that you won’t adjust your savings goals to new circumstances, such as additional financial responsibilities, higher health care costs, inflation or the vagaries of the economy. Life isn’t stationary and your retirement plan, including any target savings number, shouldn’t be either.
Consider the Big Picture
Instead of focusing exclusively on the size of your nest egg, create a comprehensive retirement plan that you’ll refine and change over time. It should include your financial goals, a net worth statement, a working budget, debt management strategy, emergency funds and any insurance. “More than a number, every individual should have their own financial plan, which is based on data,” says Aradhana Kejriwal, a chartered financial analyst and founder of Practical Investment Consulting in Atlanta. That data should incorporate estimated day-to-day living expenses in retirement, including medical costs based on your health, taxes and any large purchases you’re likely to have, such …….