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The Myth of the Magic Retirement Number: What You Really Need to Know

Antonio Cibella, CRPC |

 

 

Let’s dive into a topic that I see causing a lot of confusion and, quite frankly, a bit of frustration for me as a financial advisor—the so-called "magic retirement number." You know the one. It’s that mythical figure floating around out there that says you need a certain amount of money to retire. Spoiler alert: It’s not true. Every time I see another article proclaiming you need a million bucks to retire comfortably, I feel that deep facepalm emoji coming on. 🙄

 

So, if you’re looking for some clarity, you’re in the right place. Let's start with this: There is no one-size-fits-all retirement number. Instead, what you need is a personalized plan that fits your unique situation. Today we'll break it down step by step, and I'll give you a formula to estimate your own number—plus a few examples to guide you.

 

The Old 10x Salary Rule

 

Fidelity suggests that you should have 10 times your salary saved up by age 67. This can be a decent starting point. For example, if you earn $50,000 a year, you’d aim for $500,000 in retirement assets. If you’re making $100,000, that would be a million bucks. Sounds pretty straightforward, right?

 

Let’s test this out with someone making $100,000 a year. According to Fidelity, this person should have a million dollars saved up by retirement. But here’s where things get interesting.

 

The Steps to Finding Your Number

 

1. Identify Your Guaranteed Income: This includes Social Security, pensions, or guaranteed annuity payments. For today’s example, let’s say Social Security is your only guaranteed income. At full retirement age (67), someone making $100,000 a year can expect about $2,572 per month from Social Security. That’s around $30,000 a year, which covers 30% of the needed retirement income.

 

2. Determine How Much Income You Need: A good rule of thumb is that you’ll need about 70% of your pre-retirement income to live comfortably. For our $100,000 earner, that’s $70,000 a year. With Social Security providing $30,000, you’d need an additional $40,000 from your retirement assets.

 

3. Calculate the Draw from Your Savings: Enter the 4% rule—this guideline suggests you can safely withdraw 4% of your retirement assets annually starting at retirement age and adjusting your amount each year to accomodate inflation. Following this math 96% of the time you can make it through a 30 year retirement with a moderate investment portfolio and still have something leftover at the end. 

For a million-dollar portfolio, 4% gives you $40,000 a year as a starting distribution. Adding this to your $30,000 Social Security gives you the $70,000 you need. It looks like the 10x rule works pretty well in this scenario. But as they say in the infomercials - But Wait! There's More!

 

What About Lower Incomes?

 

Now let’s look at someone earning $50,000 a year. According to the 10x rule, they’d need $500,000 saved. Social Security will replace a larger percentage of their income—about $19,400 a year, which is roughly 40% of their pre-retirement income. This is due to something called Social Security bend points. Essentially the program is designed to replace more income for a lower wage earner in retirement than a high wage earner. The general thought there is that if you earned higher wages during your career you had more of an opportunity to put away money for yourself. In this case with a lower starting point for income - Social Security will do more of the heavy lifting when it comes time to replace that income.

 

With the 4% rule applied to $500,000, you get $20,000 a year from savings. So, adding this to the Social Security income totals $39,400—about 80% of their pre-retirement income, which is actually above the 70% target.

 

But What About A Higher Income?

 

Here’s where things get tricky. If you’re making $300,000 a year and you follow the 10x rule, you’d need $3 million saved. That sounds great, but the reality is a bit different. The 4% rule on $3 million gives you $120,000 a year, and Social Security will add another $38,140, totaling $158,140. That’s only about 55% of your pre-retirement income.

A large part of this comes from those Social Security bend points. Social Security will replace a much smaller portion of income for someone earning $300,000 a year, which leaves the portfolio to do the work. In this case, despite having $3 million in retirement accounts - if you truly need to replace 70% of your pre-retirement income you don't have enough put away for retirement.

 

But here’s the kicker: people at higher income levels often don’t spend as much as they earn. They might be living comfortably on $10,000 to $15,000 a month, so their actual retirement needs might be closer to 50% of their pre-retirement income. This means that $3 million could be more than enough if their spending is in fact lower than their current income levels.

 

The Bottom Line

 

The key to takeaway here is that retirement planning isn’t about hitting a magic number; it’s about understanding your personal needs and how your income sources match up with those needs. You might need to adjust the 10x rule based on your actual income, expenses, and how much you’re going to spend in retirement.

 

If you find yourself deep in the throes of retirement planning, and let's face it - you're 90% of the way through a blog post about retirement planning, so chances are good you are - feel free to click this link right here and see how we can help you craft a plan that’s right for you, rather than chasing after that mythical retirement number.

Until next time, Happy Planning!