Finding the right 'retirement number': How 10 advisors do it

As most advisors know, there is no magic number for how much a client should save for retirement. Some may believe a healthy start might be $1 million, $3 million or $10 million, but the “number” varies as much as each individual client. Several factors need to be considered, not the least including what they can save, and how that fits into their future needs.

We asked advisors through the Financial Planning Association and the XY Planning Network how they help clients determine their individual “retirement number,” along with how and when a client needs to adjust that number. Here’s what they said:

1. The best way is to use real financial planning software and project out future income sources, expense needs and assets with assumed rates of return based on their underlying holdings. But for a more simple calculation, assume a 4.5% withdrawal rate from [a client] portfolio and that plus any income sources like Social Security would tell them.

So if they need $5,000 per month income, and they have $2,000 per month from Social Security, that means they need $3,000 per month from their portfolio, or $36,000 per year. if they have a $1million portfolio at 4.5%, that would give them $45,000 per year or $3,750 which would help them meet their goal.

— Benjamin Offit, CFP, Offit Advisors, Columbia, Maryland

2. A simple formula is to multiply their expenses by 25 to obtain their retirement number.

We can back up this number with a present value calculation and a formal financial plan. — William R. Parrott, CFP, president and CEO, Parrott Wealth Management, Austin, Texas

3. Depending on their age, I forecast a rate of investment of 7%-8% pre-retirement and 5%-6% post-retirement. I assume they’ll live to at least 90, but if they’re younger, I run it to 95.

To determine income needs, I use a replacement ratio (what percent of current to replace) of 75%-90%. This only gets us in the ballpark, but it’s a good starting point.

— Joshua D. Hargrove, CFP, Insight Wealth Partners, Plano, Texas

4. The concept of retirement being a number is a misnomer. It’s so custom for each person based on things like spending habits, lifestyle and family. People should examine how much they spend and make sure to have line items for things like travel and the lifestyle they want to live in retirement. Don’t forget to add medical, Medicare part B, C and D and potential long-term care that may be needed.

General rule: Whatever their investment portfolio is, multiply it 4% to find out a safe distribution rate. Another general rule: Whatever they are spending currently, multiply by 80%.

— Bradley Lineberger, CFP, president and founder, Seaside Wealth Management, Carlsbad, California

5. The time value of money is a calculation that can be used to forecast the value of savings today or in the future. By using the future income need and years until retirement with an assumed inflation rate and duration of retirement, you can calculate the total assets needed for a successful retirement.

By using the assets needed at retirement from this calculation, the current assets saved, length until retirement and an assumed rate of return, then you can calculate the annual savings needed to reach that retirement savings goal.

— Zachary Bachner, CFP, Summit Financial, Sterling Heights, Michigan

6. The amount of money you need for retirement is largely dependent on your annual expenses and your sources of guaranteed income, if any, such as your Social Security benefit, pension income or real estate income. A successful retirement is not so much about accumulating a certain amount of money as it is about having enough income to cover your expenses, regardless of where that income comes from.

Variables that impact the amount of money you need to retire include your guaranteed sources of income, your annual expenses and the projected length of your retirement.

— Jason Dall’Acqua, CFP, president, Crest Wealth Advisors LLC, Annapolis, Maryland

7. Instead of targeting a single number, I work with clients to understand the behaviors, contributions and assumed returns that would provide a comfortable retirement. We almost never look at what the “peak” assets are as clients reach retirement, but that would tell us what the number is, if needed.

We make adjustments if they need more cushion for health care events or other surprises.

— Justin Pritchard, CFP, founder, Approach Financial, Montrose, Colorado

8. Every retirement plan that we create is based on a fluid situation. We use a series of actual market performance [numbers] to help our clients understand the likelihood of their plan’s success.

At least once a year, we sit down and review their life, changes to their plan, and an updated set of outcomes they can expect through the rest of their lives.

— Chris Ward, CFP, EntryPoint Wealth Management, Edgewood, Kentucky

9. We start by having a conversation with a client about what their ideal retirement would look like. We look at what age they would like to retire, how much their current cost of living is, and what we would project their retirement cost of living to be. We run an analysis using retirement planning software that runs hundreds of scenarios to give us a probability of success with the plan we have in place.

We adjust this number if our client has life changes such as having additional children, changing goals, wanting to work longer or not as long, job changes etc.

— Kayla Welte (Andrews), CFP, District Capital Management, Washington D.C.

10. A retirement number is a very male concept, like a score in sports. Women tend to look at different pockets of spending, instead of a single number. What will it take to have health care, or what kind of income can I generate to replace my income. We need to talk more about a life than a score!

— Nadine Marie Burns, CFP, president and CEO, A New Path Financial, Ann Arbor, Michigan