Why It's so Hard to Answer the Question "How Much do I Need for Retirement?"
For those who don’t know how financial planners put together a financial plan, it can be hard to understand why we can’t give you a definite answer to the question “how much should we have saved in order to retire comfortably?”
The truth of the matter is it’s not a question that can be answered casually. It’s not something for which financial planners can or should have a benchmark. And any articles that you read claiming to give a prescriptive number? Forget about it.
Why is that? You see, the amount you need saved depends on a multitude of factors. Every household has different goals in retirement, spending levels, health concerns, social security benefits, estate goals, and a bunch of other deeply unique considerations that make a universal “savings goal” a complete waste of time.
But that’s not even the most challenging thing about it.
Think of it this way: you probably know what the rest of today is going to look like. But what certainty would you say you have about how the rest of your day is going to go? I might be as confident as to say that I am 95-98% certain how the rest of my day is going to look.
What about tomorrow? I mean, probably 92-95% certain. I’m fortunate in that my days are fairly consistent and predictable. But there’s a chance that something could throw it off, right? And there are more chances to be thrown off my schedule between right now and the end of the day tomorrow than there are between now and the end of today, right?
How about my day a week from now? I’m probably around 85% sure what next week will look like. In my house, we usually make plans about a week out but sometimes things pop up or we need to see certain people spontaneously.
What will my day look like this time next year? At this point I could guess with a decent level of accuracy assuming things keep going the way they’re going, but I couldn’t realistically say that I’m more than 50% sure what this day next year will look like.
Do you see where I’m going with this? As much as time is an opportunity, it is also a variable for which we struggle to account. So even when I know all the data points that I need to create a financial plan for a client, there’s still a certain amount of educated guessing that needs to happen in order to give an answer.
And then, of course, that answer comes with caveats. We need to assume that the spending assumptions projected that far into the future are accurate, that existing social safety nets remain the way they are, that investments continue to be aligned with their statistical risk and return. As much as we would like to pretend that financial planning is pure science, it’s just as much of an art as it is something hard and steadfast.
What on earth is the solution, then? The solution is to make financial planning a habit and not a one-time event. When we prepare a financial plan for a client, only one of the many reports that we generate is an estimate of the balance needed on day one of retirement. We look at a myriad of indicators to make sure that a household is on track to meet its goals.
But one financial plan is a single point in time. To give the most meaningful advice, we need to observe trends over a body of years. As I always say: financial wellness is a process that takes choice. I choose to take one step today and if I can, I’ll take another step tomorrow. A successful retirement is the result of this process and the sooner we start the financial planning process, the longer we have to develop strong habits and meaningful outcomes.
The most important part to remember is this: a good financial planner will help you optimize your finances and strike a balance between living well today and preparing for the future. The last thing great financial planners do is punish. If anything, we should be acting as your personal (realistic) hype machines.
As a financial planner, I am almost always excited to talk about someone’s finances. But you can see how it might be hard for me to convey all of this to someone in the time that they wanted me to just say a number.
This is a self-serving recommendation, but my number one piece of advice is to reach out to a financial planner and invest the time to make sure that you’re on the right track to achieve your short and long-term goals. We can review your situation to help you get the most out of your money. If you aren’t on track, it’s better to know sooner rather than later. If you are on track, you can sleep a little more easily.
John Howe-Wemett, CFP®, M.S.
