Many people like to think of reaching financial independence as saving up to a certain net worth. This is understandable. Having a numeric goal is easy to visualize and easier to calculate and plan for than not having a concrete number to work with. Unfortunately, just about everyone is going to change their number as they walk the journey, and that often throws them off. If your number changed, too, and you are wondering what’s up, here are a few reasons why.
You likely miscalculated inflation, and that changes everything. Many people underestimate inflation because 3 percent a year sounds like nothing. In reality, you are looking at everything doubling in price every 25 years even at a meager 3 percent a year increase. On the other hand, people who overestimate inflation are in just as much trouble because they are going to work much longer than they have to. After all, a 1 percent difference can mean a decade worth of working and saving.
Projecting future returns is impossible, so you could hit your number extremely early or you may never be able to. I don’t understand why everyone in the media is forced to project future returns because no one will ever get it right. Future investment returns is one thing that’s never going to be exactly estimated because you first have to know how the economy is going to expand years into the future, and then you need to know how much the investment community is willing to pay for that growth. Both are impossible to figure out. What you can control is your savings rate and what you invest in. All you can do is let the rest take its course and adjust if needed.
How you feel about wealth in a few decades will be different from how you feel today. I remember thinking $1 million was a pie-in-the-sky number when I was in college. Now, I feel like $1 million is not nearly enough to retire on because the safe withdrawal rate of 4 percent means I can only safely withdraw $40,000 a year — a figure that doesn’t cover our current family expenses. And if I factor in my inherit need to be more conservative than the 4 percent rate to feel more secure, plus paying taxes and such on that figure, I’m looking at an even lower number.
In fact, how you feel about almost everything will likely change in the future. Perhaps you really hate your job, and you are willing to scale your lifestyle back. On the flip side, you may be in an enviable position where you love your work and don’t need to retire, even if you can theoretically retire comfortably without that paycheck. Your family situation can also change. You and your partner may decide to have more kids. Or your kids can have grandkids. You probably would like to visit them often, even if you don’t need to provide any financial support. This will cost money. There are endless examples I can give here, but you get the idea. The amount of money you need to live a good life now will be different from the amount in the future because your vision of a good life will change as your situation evolves. For most of us who aren’t on the cusp of retirement, our projection of what we need to spend in retirement will be way off.
Having said all this, I actually encourage everyone to think of a number. This helps you make retirement more real, and it helps motivate you to save more. Just make sure you understand that the number will probably change, and embrace the adjustments as you make them.
David Ning is the founder of MoneyNing.com.
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Why You Should Be Comfortable With an Ever-Changing Retirement Number originally appeared on usnews.com
