When it comes to retirement savings, everyone wants to know the quick and easy answers to these common questions: “How much do I need to save in order to retire?” and “Do I have enough?”
We’re all trying to determine the magic number of how much income we need in retirement, but the problem is that we are all different. We lead different lifestyles, we each have our own income needs, we envision our retirement in our own way and, to be blunt, we each have a unique, unknown life expectancy.
The life expectancy factor is the trickiest one, because there is no way to confidently predict how long we will live, and we actually tend to underestimate our own longevity. While in the past, life expectancy was shorter, today we are living longer, healthier and more actively than previous generations before us. That’s the good news and the bad news, because our retirement dollars may need to last longer and work harder than we realize.
When asked the ubiquitous question about the retirement magic number, financial advisors may want to go through these three steps with clients, to begin to help them better prepare to live an enjoyable and efficient retirement:
Step 1: Inventory income.
Ask clients what percentage of their current income they think they will need when they retire, and then log the sources of income they will receive in retirement. Depending on what their current and/or former companies offer, income sources might include a pension, Social Security wages, 401(k) plans and personal savings. Once the list is compiled, go through and try to value each item. For example, ask clients to provide an up-to-date Social Security statement, for themselves and their spouse, and talk them through their options for when they will begin collecting these benefits. For savings accounts and company-sponsored plans, take a look at their current balances and growth trends, and ask them how much income they hope to take from those each year. Add up the projected incomes, and show your clients how that figure measures against the percentage of income they expect they will need in retirement.
Step 2: Evaluate savings.
Remind clients that there is one retirement pot over which they have 100% control: their personal savings. With all of the other uncertainties, clients should be doing everything they can to save as much as possible. Have clients start paying more attention to all of their “little” expenses, such as their morning lattes, delivery/shipping fees, unused data on their phones, etc. If they take the time to tally these splurges, they’ll soon realize that over time, they add up to a much larger sum than might be expected. What looks like only $15 per week becomes $780 per year and almost $4000 over five years. This is money that could be maximized in another, more productive manner. Maybe that money is put instead towards increasing their 401(k) contribution, building up their IRA balance or taking advantage of the catch-up provision. Whatever their preference may be, there are several options that can help clients max out their savings, even by taking small steps.
Step 3: Envision the future.
Ask your clients these three questions: When you retire, where will you be? What will you be doing? Who will you be with? These questions can be fun, but they’re also very helpful in financial planning because clients’ answers can often give rise to a greater discussion about their financial needs. For example, if clients say that they imagine they will remain in their current home, ask follow-up questions regarding how they plan to maintain the home. If they say they will move, either to downsize or relocate, how will they afford moving expenses? When they consider what they will be doing in retirement, this will help you find out whether they plan to keep working, either full- or part-time, or whether they hope to take up hobbies, such as golf, or want to travel. The level of activity they indicate wanting to have in their retirement will drive and determine the amount of income they will need. Finally, asking them who they will spend their time with will facilitate a conversation around how they plan to maintain and grow their social network as friends and family move, pass away or become preoccupied with other matters.
Taking clients through these three steps might help you get closer to determining a financial goal for their retirement, but at the end of the day, there really is no magic number. The bigger question to ask is, “How do you measure success in retirement?” Ask your clients whether a successful retirement entails achieving a specific number, or whether a successful retirement is one in which they are happy, healthy, living comfortably and engaging with friends and family.
When it comes to retirement, it is important to think not just about quantity, but also about quality. You can certainly help clients calculate and tabulate to come up with a figure that will give them greater financial peace of mind, but that is only one part of the equation. By going through these exercises with clients, you might just be able to hit two birds with one stone—helping them to come up with a target number while also helping them plan for their desired quality of life in retirement. Getting clients to think about their retirement goals from both perspectives, in the end, is a resolution that goes beyond the magic retirement number.
All information provided is for informational and educational purposes only and is not intended to provide investment, tax, accounting or legal advice. As with all matters of an investment, tax, or legal nature, you and your clients should consult with a qualified tax or legal professional regarding your or your client’s specific legal or tax situation, as applicable.