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Retirement savings goal is no magic number

Coming up with "your number" — the amount of money you will need to retire comfortably — is a preoccupation for many. But that exercise may actually be counterproductive.
/ Source: The Associated Press

Coming up with "your number" — the amount of money you will need to retire comfortably — is a preoccupation for many.

Some financial services have encouraged the quest, most memorably ING in TV commercials showing baby boomers with bright orange numbers with dollar signs on their heads.

The concept has gained urgency in recent years, especially after two market meltdowns that eroded retirement savings and confidence alike.

But it may actually be counterproductive. Rather than a decades-long, potentially futile effort to reach a huge number, you may be better off setting achievable benchmarks along the way.

That's not to say that setting financial goals for retirement and trying to reach them isn't important.

Many people, after all, are on pace to run low on cash in retirement, which will leave them needing to rely on Social Security checks that average only about $1,100 a month.

About 36 percent of early boomers (currently age 56 to 62) alone are at risk of not having enough money to pay for basic expenditures and health care costs through 20 years of retirement. That's based on an analysis of recent retirement savings, housing equity and other data by the Employee Benefit Research Institute.

There's a problem, though, with attaching a single, large number to your aspirations. Coming up with a reliable number for your retirement savings goal is tough enough. Reaching it might feel impossible. And that can be deflating.

"Looking at a monster number and thinking 'I'm never going to get there' causes a lot of procrastination," says Anne Arvia, senior vice president of retirement plans for Nationwide Financial. "It can be overwhelming."

If your retirement savings strategy is built around reaching a particular number, you are probably at greater risk of having it derailed.

Cathie Collins, 51, of Littleton, Colo., has been calculating her "magic number" since she was in her 20s. Relying on financial advisers and planning tools, she calculated it at $1 million, and later $1.2 million, in order to maintain the same standard of living in retirement.

She did all the right things financially: living frugally, saving aggressively, investing regularly, fully funding her retirement plans and paying off high-interest credit cards.

With a six-figure income as an information technology consultant, Collins seemed destined to reach or exceed her number. Then a series of life events set her back: divorce, some bad investments, the market crash that wiped out as much 40 percent of her savings and, last year, a layoff.

Instead of being three-quarters of the way to her savings goal, as she said her guidelines suggest, she's only about halfway there.

She still tracks her progress occasionally through some of the many online retirement calculators. Some help you calculate your number, while others chart different paths to retirement security.

Collins is honing in on other things now, such as paying off the mortgage on her condo, maintaining a healthy emergency fund and managing her stock portfolio more closely, guided by a Vanguard financial planner.

"I'm not as obsessed about it as I used to be," she says of her number. "I've already accepted the fact I won't hit it. But I do think it's worth striving for."

Some experts think retirement calculators entail too much guesswork and overestimate the extent of spending in retirement.

They think you're better off focusing on other areas besides a seven-digit savings figure.

One increasingly popular concept advocates setting a savings target that's a multiple of current household income. It's a more manageable way of staying on top of your progress toward retirement security.

Most advisers say you'll need to make anywhere from 70 percent to 85 percent of your pre-retirement income to maintain a similar standard of living in retirement, although it can vary widely depending on lifestyle. The capital-to-income ratio, introduced in 2005 by financial adviser Charles Farrell, holds that you should have about 12 times your income in assets by age 65 in order to produce 80 percent of pre-retirement income.

Under that formula, you should have 5.2 times your income set aside at age 50, meaning someone with a $60,000 salary at that age would need to have $312,000 in savings to be on track.

Lowering spending expectations in retirement makes it easier to keep pace. Having 10 times your income saved by age 65, for example, would enable you to live on 70 percent of pre-retirement income.

Comparing capital to income is more reliable than a savings target because it's tied to your current spending habits, argues Farrell, of Northstar Investment Advisors in Denver.

"People are generally overoptimistic about what they can do with their personal finances," he says. "Income is used to establish our lifestyle, so I think it's the most honest way of looking into the future and deciding what your needs might be."

Any number is only a rough guideline, of course. Assumptions and projections are subjective and vary from formula to formula.

For example, a similar ratio developed by financial services company TIAA-CREF holds that your savings should be 8½ times your salary by age 65. That same 50-year-old with a $60,000 salary would be on course with just over four times salary, or a little more than $240,000. This asset-salary ratio assumes that Social Security would replace 25 percent of income, versus 20 percent under Farrell's formula.

A simpler approach, advocated among others by Principal Financial, holds that the average investor should focus on saving 11 percent to 15 percent of pay over a 40-year career in order to be OK in retirement.

Any tool that gets someone to save aggressively for retirement is probably a good one. And if someone is close to retirement but far short of their number, they can still make "bite-sized moves," says Bob Sollmann, who heads the retirement business at MetLife. Those might include bumping up the portion of your paycheck that you save by 1 or 2 percent, or considering moving somewhere less expensive in retirement.

"If a number is a way to motivate someone to get somewhere, that's good," he says. "But at the end of the day, it's all about taking action."