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Forget About Your "Retirement Number." Here's a Better Saving Strategy

By Alicia Rose Hudnett - Jan 13, 2017 at 8:04PM

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Your goal shouldn't simply be an account balance. It should be a healthy stream of income.

If someone gave you $1 million, would you know how to safely manage it, rather than squandering it right away? How about over the next 30 years?

If you find that second question a bit daunting, then you're not alone. But it's the sort of question you may have to answer when you're finally ready to retire and start living off of your retirement savings. And whether or not you have $1 million saved, the point is still the same. After decades of working and receiving a paycheck and income on a monthly basis, when we retire, we're expected to know how to take one lump sum of money and turn it into an income stream.

IMAGE SOURCE: Scott J. Waldron,

Most of us spend our entire working lives receiving regular paychecks and saving as much as we can for retirement. We spend years figuring out how to make the most of our monthly income, minimizing our spending in order to keep that nest egg growing. Then, once we finally reach retirement, we're supposed to know how to reverse that process of accumulation and live off of a lump sum of money -- potentially for decades.

Retirement accounts are where many Americans stash their long-term savings, yet few of us have experience managing so much money at one time. This is dangerous, as there may be no do-overs once you've cut ties with your employer and begun spending down your retirement savings.

It doesn't matter how much money you have if you ultimately mismanage it. After all, statistics show that up to 70% of lottery winners lose all their winnings within a few years. And although that $1 million nest egg that so many financial experts recommend may sound big, it will only generate $40,000 in yearly income, assuming you follow the 4% rule. So it's important not to overestimate how much money you have or to forget that retirement can last a very long time -- think 30 years or more.

A new approach

Retirement advice often emphasizes achieving one "magic" number. A more useful way to approach retirement planning is to figure out how much monthly income you'll need and how you will generate that income.

If your retirement is decades away, it's difficult to forecast what your monthly expenses will be and what your life will look like. Retirement planning for you should consist mainly of saving as early and as often as you can, checking in on your net worth multiple times a year. But for those of you nearing retirement -- say, 10 years or less away from the big day -- you should have a much clearer idea of your future monthly expenses. Start by calculating how much you'll need each month to cover your non-discretionary bills, i.e., bills you must pay. First, think about one of the largest monthly expenses for many people: housing costs. Will you be renting, or will you still have a mortgage to pay? Next, come up with a ballpark figure of what you spend on your utility and grocery bills. Essentially, you want to include in this number everything you need to pay every month.

Once you have an idea of how much monthly income you'll need to cover these living costs, head over to the Social Security Administration's website, create a personalized account, and see what your expected monthly payout will be. If there's a gap between your Social Security benefit and your non-discretionary monthly expenses (and there almost definitely will be), you'll need to go to your next income source: your retirement savings. One of the more predictable ways of producing steady income in retirement is through the use of a lifetime income product, such as an annuity. And while these can be complex products, they can assist you in generating income from your accumulated assets by annuitizing a portion of your savings and sending you a fixed amount every month, possibly for the rest of your life.

Figuring out your "retirement number" is a start, but you need to go a step further and figure out how to responsibly spend those savings over the course of a few decades. That's the key to a financially secure retirement.

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