Planning a financially secure retirement means doing the homework up front to figure out how much money you're likely to need in your golden years. Your "retirement number" -- the amount of money you'll have to save up before you're ready to retire in comfort -- depends on a number of factors, such as when you plan to retire and what sort of income you'll need to support the retirement lifestyle you want to lead.
Our Motley Fool experts have slightly different views on how often you should adjust your retirement number, but all three agree that you need one. Read on to learn what they think.
Having a sense of your retirement goals is important, and a retirement number can be a good target to use. But that number works well only if you're smart about how you come up with it and disciplined enough not to let it change without good reason.
The primary danger of reassessing your retirement number too often is that you can end up chasing the performance of your investments and boosting your risk level unnecessarily. For instance, six years into the current bull market, many people have started raising their expectations about future returns, increasing their retirement number in order to allow for a better lifestyle. If that leads you to be more aggressive with your investments when the market is more likely near a peak, then your quest for outsize gains could cost you dearly when the market experiences a correction -- and then you may find yourself struggling to reach even your original retirement number.
That doesn't mean you should never change your retirement number. Important life events like getting married or divorced, having a child, or losing a family member can have dramatic impacts on your financial needs, and making adjustments to your retirement goals in those instances makes perfect sense. But absent those major life changes, your retirement number can generally remain little changed over the years, giving you a stable target to aim at throughout your career.
In many ways, I agree with Dan's suggestion that reassessing your retirement number on a regular basis can be harmful. But I think it generally applies to those who want to live as plush a retirement as possible.
There's another group that, instead of aiming for a lavish retirement, wants to reach retirement earlier than most people. Though it may be on the extreme end, I think such savers can benefit from evaluating what their retirement number is at the end of every year. That's because instead of focusing on juicing returns, these savers can focus on cutting the fat out of their budgets.
For instance, at the end of this year, my wife and I sat down to see how much we spent during 2014. Let's say that figure was $50,000. We subtracted rent/mortgage expenses (this depends on your living situation), as well as a huge chunk of our life insurance payments -- as we probably won't need to pay these in retirement.
After adding in a ballpark figure for long-term care insurance, we saw that we could continue living the same lifestyle that we enjoy now for about $35,000 per year in retirement. Using the 4% withdrawal rule, that puts our retirement number at roughly $875,000 before Social Security.
This method isn't perfect, as it ignores some tax implications. But the value is that it allows us to see the cause-and-effect relationship that our lifestyle choices have on when we may become financially independent.
As Dan Caplinger said, absent important life events, your retirement number can remain little changed throughout your career. I want to stress, however, that it's important to have a plan in the first place. If you don't have a retirement number, then get to work. If you do, it's worth revisiting at least every five years to see how your retirement plan is progressing and to update it if anything has changed.
One risk of changing your plan more often than every five years is that, particularly as you near retirement, you may lower your retirement number out of haste, rather than necessity. Many people get into their late 50s or early 60s and get impatient to retire, though they aren't where they need to be in terms of retirement savings.
Especially when you become eligible for reduced Social Security benefits at 62, the risk is that you make an emotional decision about retiring early, only to set yourself up for a lower quality of life later in retirement than you had ever planned.
Have a plan and stick with it. Don't move the goalposts when you get close to your retirement age.