With Retirement Savings, There Is No "Magic Number"

March 2, 2011
Henry Stimpson

When it comes to planning for retirement, there is no exact number for how much you should save -- defining an exact savings goal for everyone is impossible. But you can calculate a range to come up with an attainable goal for yourself by following these easy steps.

How much savings do you need to retire?

Television ads say you can come up with a “magic number,” such as $1 million, but defining an exact retirement-savings goal for everyone is impossible, says financial planner Anthony Criscuolo, CFP, with Palisades Hudson Financial Group’s Fort Lauderdale office.

“The world is variable and constantly changing, and that’s why looking at a range of outcomes is more appropriate when running long-term financial projections,” he says.

There’s no exact number, he says, but you can calculate a range by following these easy steps:

Set Your Goals. “The most important part of retirement planning is to have a plan,” Criscuolo says. Establish your retirement goals to determine how big a nest egg you need. For instance, do you plan to take a lavish European vacation every year or just visit your family for the holidays?

Define the Inputs. Any financial plan is only as good as the inputs. Asking the right questions and gathering the right information are crucial when making your plan.

“You want to use conservative, but realistic assumptions,” Criscuolo says.

For example, overestimating market returns can be dangerous. Stocks historically have returned about 8% year over the long haul, but there have been wild swings up and down over shorter periods. Be conservative when inputting your assumptions about market performance.

Next, prepare a detailed financial analysis, or cashflow projection. It should take into account all sources of income, expenses and current assets, and project your cash needs throughout retirement. While you can do a rough estimate with a calculator or by using some free online software, it can be wise to consult with a financial professional to prepare the cashflow analysis.

Run multiple projections by changing some of the inputs, including your expected income and expenses, retirement date, the expected rate of return based on your long-term asset allocation, the expected inflation rate, and life expectancy.

These different scenarios will produce a range of outcomes and thus provide a realistic range of what your “number” should be. Generally, the more variables in the projections, the more scenarios you should run, and the wider your range will be.

Act on the Projections. If the projections show you’re on target for retirement, great. If not, change your plan. “While it’s hard to increase income, you can usually decrease expenses, change your asset allocation to achieve a higher expected rate of return, or change your retirement date,” Criscuolo says.

Revisit Your Plan. Creating a financial plan should not be a one-time event. “A financial plan is not a map you draw once,” he says. As your life changes, so too should your financial plan. Revisit your cashflow projection and other financial-planning documents every three to five years, or whenever you’ve had a life-changing event such as a new baby, divorce or a career change.

Even in the absence of life-changing events, tax laws and the economic environment are constantly changing. “That is why periodically revisiting your financial plan is just as important as making the plan in the first place,” Criscuolo says.

Palisades Hudson is a fee-only financial-planning firm and investment advisor headquartered in Scarsdale, N.Y., with $1 billion under management. It offers estate planning, insurance consulting, trust planning, cross-border planning, business valuation and appraisal, family office and business management, and executive financial planning. Branch offices are in Atlanta and Fort Lauderdale, Fla.