Retirement: Are You Just Throwing Money at a Number?

Have you seen the commercial from ING where the guy is out walking his dog carrying a sign with something like $1,086,532 in cut-out numbers? A neighbor stops to ask him, “What you got there?”

The man explains it is his number – the amount he “needs to save to retire the way he wants.” He notices his neighbor has a sign of his own…”$ GAZILLION.” “Is that your number,” he asks.

“How do you plan for that?”

“Oh, I blindly throw money at it…hope something good happens.”

Here’s a look at the commercial:

While it is sort of humorous look at retirement planning, I suspect it represents the sort of planning most of us do when it comes to far off goals. I have sat down a time or two to attempt to arrive at my own ”number,” but it is rather difficult to predict what life may be like a few decades from now.

Save as Much as  I Can

Up to this point my retirement strategy has been to “save as much as I can,” which reminds me a little of the gazillion guy. “Saving as much as I can” is not a viable strategy for retirement planning.

Instead, I should come up with a goal amount, a number, based on our current living expenses, project what our retirement income needs may be, and factor some unknowns like inflation, health care costs, etc. Now you see why arriving at a number is so difficult.

Then there is the daunting task of developing a savings strategy for reaching your number. The dog-walker in the video is a little older than me, so for simplicity I will double his number for example purposes.

Let’s pretend my number is $2 million. I’m roughly 25 years from traditional retirement age, so I’d need to save about $3,500 a month at 5% rate of return and 3% inflation, assuming I had no savings right now, to reach this retirement savings goal.

Just $3,500 a month, huh? No problem…just have to set aside a little after I pay the mortgage, the food, the utilities, put gas in the cars, etc, etc. Nothing to it. Yeah right.

You see why this gets overwhelming.

Now let’s assume I’ve been reading Frugal Dad the last four years and socking way a huge amount of savings. I have $100,000 saved towards retirement. With this starter savings amount in place, I only need to put away $2,800 a month to reach my goal.

That’s still a decent chunk of money, but I suppose if I pay off the mortgage early, take on a second job, and/or forgo things like eating and lights I might could scrounge up the money some years down the road.

By now I hope you understand the importance of starting early – particularly if you are reading this and your age begins with a 2!

This is how the exercise usually works for me. Rather than coming up with a goal number, I plug whatever seemingly small amount in I can afford to set aside each month for retirement, extrapolate out 25 years and see what the balance will be. The problem is, using this method I come up woefully short of my “number.” Sigh.

Determining Your Number

Much of the success or failure of this exercise comes from the first step – determining your number. There are plenty of retirement calculators out there that will help you arrive at this number. My suggestion is to use three or four of them and take the average. Most brokerage websites have calculators freely available, as do most major financial sites – Google is your friend here.

One drawback to these online calculators is that they make some pretty broad assumptions. It’s difficult to personalize the assumptions based on your lifestyle, your appetite for risk, your frugality, etc.

I often find the stated income needs in retirement to be much higher than what I really believe I could live on with no debt, no mortgage and a relatively simple lifestyle.

Take the results for what they are – a ballpark figure from which you can make adjustments to arrive at your “number,” or even better, your “Goal Retirement Range,” or GRR, an acronym I use to represent the range I’d be happy retiring on (and an acronym that adequately represents my feelings when trying to perform these retirement planning exercises – GRR!)

Your GRR may look like $600,000 – $800,000. Your neighbor may prefer a GRR of $1.2 – $1.4 million. It all depends on a variety of personal factors.

Just don’t let your GRR look like “oh, somewhere between $1 and $2 gazillion.” How do you plan for that?

Comments

  1. I’m a good 30 years away from retirement and find it very hard to come up with ‘my number’. Lately I’ve been using my crossover point as a proxy until I get closer to retirement and can nail things down a bit.

    The crossover point is when you can live off the interest from you savings. With interest rates so low, my current number is really depressing. But at least it’s a number.

    But after calculating this, my strategy is to just throw as much money at the ‘problem’ as possible. Maybe I need a better strategy!

    • I hear you with respect to interest rates. I reread Your Money or Your Life from time to time and with those 7% bonds were still around! Heck, I’d be happy with 3% on savings at this point!

  2. The problem is when you are young enough to make a significant impact via compound interest/gains there are so many variables to determining a savings plan it is impossible to make any sane projections. Yet, when you are old enough to make decent projections about retirement needs you have lost the benefit of the biggest arrow in your proverbial quiver (time), so if you have a significant gap you are in trouble with few ways of making any significant impact.

    Think about it for a minute, let’s say I’m 23 and just entering the work force. How much retirement income will I need? Can I estimate my retirement needs based on income replacement levels? Not likely as I have zero idea what my income will be in 35 years. Can I estimate based on projected costs? Again, not likely as I have no way to determine what social security may look like, healthcare, living expenses, etc. Heck, as a 23 year old I would be impressed if I can just afford the basics of living on my own.

    Don’t get me wrong, I think folks need to put some thought into how to gauge their savings plans and come up with a general retirement plan. It’s just a very very murky set of calculations and assumptions where small changes have drastic impacts in the end number.

    I think in your 20′s/30′s we would be better off coming up with a good (and simple) rule of thumb that accelerates your savings rates as you grow in your earning capacity. By the time you hit 40 you should be at a good point to start making some real concrete projections as you will understand your career path and earnings potentials, you will more than likely understand your housing situation and your dependent costs. You will also have between 15 and 25 years to make the necessary adjustments.

    • I totally agree. It’s just too hard to guess what is going to happen over the four decades of a stereotypical person’s career. Even going out past 10 years is awfully hard. You just have to save as much as you can muster and adjust as you go along.

  3. My situation is a little different, but I’m sure it still requires planning. I plan on retiring from the Navy in around 4 years, which will give me a monthly pension of +- $2300 a month. So my number is undoubtedly lower than most people, isn’t it? I would think that having a pension already in place would reduce the amount of saving I’d need. Thoughts?

    • No doubt you must consider your pension, but I would think of it as I would any other “investment” throwing off roughly $2,300 a month.

      Does it have some of the same risks associated with other “investments?” Rate changes (reduced benefits), inflation (with cost of living raises that don’t keep up), bankruptcy/austerity (reduction in benefits/elegibility, etc.).

      Continue to try to save, diversify income streams, etc. to supplement your pension income heading into a second career and/or retirement.

      And most importantly, thank you for your years of service!

      • Ever so theoretically, my pension is never at risk. every now and again Congress will come out and say they want to reduce benefits or whatnot, but so far so good. At least I should have the pension and some serious health benefits too. That will also help us a great deal in our retirement years. Thanks for the thoughts and help!

        • Hi Dan, your pension is only as good as the financial company that backs it. In this case its the US Gov. If the Gov decided to declare bankruptcy you could be at risk. Its unlikely, but hey look at the situation in Europe right now. Heck, look at the budget issues in California (im in California).

          Diversification is still important but I would say more importantly inflation protection is important. People are living longer these days and although you are guaranteed income, what good is $2300/month if rent inflates to $2000/mo or more?

          • While I think that it’s entirely possible that the government can fail, I’m also grateful that my pension isn’t back by any particular state, which hold stricter requirements on debt. At any rate, I will continue to diversify and follow the rules, I would just think that I wouldn’t need as much as a non-military retiree income-wise. True?

  4. Taking Action:
    I work in a financial planning office and the most common objection is “I cant set aside that much money.” There are a number of reasons such as mortgages, tuition, children, car payments and the list goes on. Ideally if everyone could set aside X amount of dollars a month then they would. I emphasize its a moving target and its something to work at gradually. I would never expect an infant to learn to run right away and the same goes with financial habits. Go slow at first and you will get there eventually. If your goal is $416/month but you can only do $100, then you should really focus on increasing that to $125 or $150. Focusing on the goal that you are willing to take action on is more important than staring at a lofty goal that will keep you from improving your current situation.

    • Elliot, that’s great advice. And your point about those using other expenses as an excuse to save is a good one. It’s one of the reasons I take the “pay yourself first” mantra to the extreme – I think you should pay yourself first out of the gate, in your first job. Learn to live on half of your income, if possible, before burdening your income with debts, payments and huge, recurring expenses. You won’t get a chance ten years later when you have a house, a spouse and two kids, and a pile of bills.

      • Jason, I agree with your line of thinking.

        People generally don’t think twice about the approximately 20-28% of taxes that comes out of their gross wages each pay period.

        We all understand that the government gets paid 1st because of federal, state, FICA, and Medicare withholdings. We accept that as an economic reality and “make do” with our net pay.

        However, why can’t we be next in line right after our government gets “dibs” on our paycheck?

        Is it so crazy to think of ourselves as a high-priority creditor and pay an amount to our savings account each pay period–no matter how small–BEFORE we pay everyone else?

  5. Amen! My recent post advocating people strongly consider NOT investing in a 401k (particularly where there is no match) drew some ire from financial planners. I’m OK with that; after all, I am simply asking people to stop and think about what’s best for their situation, not blindly follow conventional wisdom or that of a “money guy” representing a large brokerage firm.

    There are some great financial planners out there with your best interest at heart, but like any other industry, there are some shady ones out there, too.

  6. This has always been an interesting discussion for me. I have absolutely no nest egg amount in mind. Rather, I have an income target that I need to achieve for retirement.
    For example, my taxable investment account balance is almost the same as it was last year (January 1, 2011) but, that portfolio produces $3000/year more in dividends than it did a year ago. Am I further ahead? :)
    The power of dividend growth stocks is amazing.

  7. Money set aside for retirement is just one of the globe’s future problems. Of course, with the world courting deep and long-winded global depression, we’re extremely worried about the student loans default circumstance as well.

    We believe that it must get a whole lot worse as time goes on, and the spectre of a fully employed (or not) graduate body laboring the rest of their qualified lives away, simply to payback sizable student loans, involving debilitating interest rates, is the stuff of which horror films are made. Then let’s not talk about all those who wrestle to locate work, default their student loan and end up lumbered with bad credit scores for the next 7 years, not able to even scrape together a cell phone arrangement! it’s serious sleep loss stuff!!

    And if it’s this damaging in the US of A, what’s the diagnosis of those in the land of the Acropolis?

    Anyway, Best of British luck to you.

    Adore the concept of your blogsite, just for the record.

    In the infamous words of our endearing Arnie, “I’ll be back” (if you will have me) :)

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