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  • Writer's pictureRob Winkler

Cracking the Code to Retirement Savings: Unveiling Your Magic Number

Retirement planning is an intricate puzzle with a seemingly elusive solution: the magic retirement number. While a new survey by Northwestern Mutual suggests $1.27 million, the truth is that this figure varies greatly from person to person, and it's influenced by factors spanning life events, inflation, investment returns, and savings rates.

The ambiguity of this magical threshold is evident as diverse estimates are dispersed across financial landscapes. Charles Schwab's survey puts it at $1.7 million, while LendingTree pegs it at $1.07 million.

Even within Northwestern Mutual's own annual Planning & Progress study, astonishing disparities persist. Respondents in their 50s indicated a $1.56 million target, those in their 60s estimated $968,000, and those in their 20s landed at $1.2 million.

Heightening this complexity is inflation, perpetually nudging estimations upward. Notably, high-net-worth individuals now consider $3 million as their retirement threshold, indicating the rising cost of living.

"Everything is costing a bit more," observed Chris Collins, a wealth management adviser at Northwestern Mutual.

To unravel the enigma of your 'Magic Number,' financial experts offer several guidelines.

Calculate Your Individual Target:While a savings target can act as a motivational goalpost, generic national averages hold little relevance. The true magic number hinges on factors like local cost of living, anticipated retirement lifestyle, and outstanding house payments.

Financial planner Ashley Folkes of Hoover, Alabama, aptly summarizes the situation: "There is no magic number." For a tailored estimation, consider sophisticated retirement calculators such as those offered by SmartAsset or Bankrate, which integrate multiple variables.

Work Backwards from Withdrawal Rates:Retirement planners often advocate the "4% rule": Limit annual withdrawals to 4% of your total balance to ensure sustainable income. Some experts contend that 5% withdrawals are acceptable, while others advise an even safer 3%.

Bradley Lineberger, a financial planner with Seaside Wealth Management in Carlsbad, California, proposes working backward from the 4% rule. With a $1 million portfolio, an annual distribution of $40,000 ensures enduring growth. Pair this with Social Security income for a strong foundation. For those aspiring to greater comfort, a recent Bloomberg survey suggests aiming between $3 million and $5 million.

However, every estimate shares a common trait: they all feature seven-figure sums.

Revise as Needed:Reality often diverges from the target number. While the Northwestern Mutual study's $1.27 million benchmark is desirable, the Federal Reserve's Survey of Consumer Finances reveals a more modest average retirement savings of around $65,000.

Moreover, your magic number is a dynamic entity, evolving with life circumstances, earnings, expenditures, and other variables. Investment strategies, downsizing your home, delaying Social Security for larger payouts, working longer, or relocating to a cost-effective region—all these steps can edge you closer to your magic number.

"Your target will likely shift as your life changes," acknowledges Adam Hubert, a financial planner with RW Baird in Canonsburg, Pennsylvania. The road to discovering your magic retirement number is deceptively simple, yet intricately nuanced.

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