The latest fad in retirement planning is to know your “number” — the amount of money you’ll need to have saved in order to retire.
Is there really such a magic number for your retirement? If there is, can it be determined? If so, how much should you be willing to pay to find it? These are the kinds of questions you should ask every time someone pitches a financial service or product.
Think of determining such a number for the value of your retirement savings portfolio as shooting an arrow from a bow. You’re standing in an exposed hilltop field, and your goal is to hit a small target 50 yards away. This is important, because you only have one shot and you’ve bet your life savings on the outcome. You’re not a proficient archer, so you hire a coach. You have one week to prepare.
To begin with, you’d better hope that you hired a good coach, one who is honest, competent and affordable. Taking instruction from a coach who has bet against you, doesn’t know what he’s doing or demands too much in compensation could lead to worse results than if you’d just done your best on your own. You should be confident that you’ve hired the best coach possible and that he deserves your trust and whatever you’ve agreed to pay for his help.
Your coach goes to work explaining the basics of archery and making sure you have the basic skills to execute the required shot. This seems like pretty valuable stuff, since without this basic knowledge, and a little practice, you’d have little chance of hitting a barn door at 50 feet, much less this small and distant target.
After some time practicing, you both decide that it would be best to find an intermediate target — something along the ideal flight path to aim for that isn’t so small and far away.
Your coach gathers information about the conditions of the shot and the characteristics of you and your equipment. He uses this information to perform some rather complex mathematical calculations and produces a special device. It’s a steel ring, 12 inches in diameter, mounted vertically on the top of a long pole about halfway between you and your target.
He explains that according to his calculations, if you shoot your arrow through the ring, you will hit the target. He’s double-checked the assumptions and numbers and is confident in his advice. He then explains that he needs to leave and asks to be paid. Now, you’re on your own until the time comes to make the shot — still four days away.
How valuable is your coach’s advice? What is the probability that you’ll hit the target, using the advice? These are difficult questions to answer, but it should be obvious that there is a significant possibility of failure.
Even if the calculations and assumptions were sound, the conditions could change between the time they were made and the time the arrow is released. In addition, the conditions could change as the arrow is in flight. An unexpected gust of wind, a misalignment of the eye, or a flaw in the bow or the arrow could affect the arrow’s arc and cause a complete miss, even if the arrow travels through ring.
In other words, there are so many variables to consider and predict, and the distances to travel so great, that the odds of identifying a number today that will lead to a particular outcome at some more distant point in the future are extremely low.
At best, at any point in time, there is a range of potential numbers that will likely produce the desired outcome. This range will depend on who is doing the figuring and how you will handle the myriad decisions you will have to make along the way — for the rest of your life.
While it is useful to estimate your number as part of a well-conceived and well-managed retirement plan, the number’s value evaporates shortly after it is estimated, and it’s not worth much on its own. It needs to be calculated again and again over time, and used as a checkpoint in the process of navigating your investment portfolio along the ideal path.
Yes, there is a number — or numbers — but the magic is nothing more than an empty promise.