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Retirement Matters: There is No Magic Number

Clarity. It is the first scientific principle of modern goal setting theory as detailed by Dr. Edwin Locke, the Obi-Wan Kenobi in this area of study. It is about knowing exactly what you are trying to achieve and when. It is about specificity; about being able to measure a goal's outcome.


With this in mind, it would seem that the same theory should apply to funding retirement, right?


Wrong. When it comes to retirement, there is no magic number. There is simply no way for anyone to accurately predict the exact amount of retirement savings you need to achieve by an exact date in the future in order to ensure retirement happens exactly the way you want it to. The reason? Retirement planning is not an exact science.


Here are some sobering facts about how retirement income has changed in recent years.

  • The Future of Social Security is unknown at best. Here is the reality. If nothing is done to change the current trajectory, the Social    Security Trust Fund will run out in 2035. At that point, all participants can expect to receive 75 cents on every dollar of their scheduled benefit.


  • People are living longer and longer. You have probably heard that line one too many times to want to pay attention to another financial advisor repeating it. So, forget the line. Think about it historically. According to the social security administration actuarial tables, a man, today, who reaches 65, will live on average until age 84.3. A woman of the same age will live to 86.6. Since 1940, those numbers have increased by about 3.5% every 10 years for men and 5.5% for women. That gives us every reason to believe that within 30 years, the AVERAGE life expectancy for both men and women could be around 95.


  • Average annual inflation over the past 40 years is 3.81%. Sure, current inflation is suppressed in large part due to the extended low interest rate environment we continue to experience. However, when planning for a retirement that could be 30, 35 or even 40 years in length, we need to account for all types of inflationary and interest rate environments. Someone who needs $100,000 per year of retirement income today, will need to plan for having $295,758 in 30 years in order to maintain the same level of spending.

Given things life inflation, life expectancy, and the future of government programs like social security (Medicare and Medicaid too, while we are at it) how can anyone be sure that a certain number will provide them a fool-proof retirement plan? They can't. No way, no how.

When it comes to retirement, a smarter method of planning revolves around the goal setting theory of Dr. Randy Marshall, who differentiates between goals (things that we have total control of) versus desires (things that are somewhat or totally out of our control). The key idea here is establishing good habits that lead to success, not just working towards a single marker. For example, if I want to lose 30 pounds (which I always do), I am better of setting a goal of going to the gym 3 times per week, understanding that the behavior will lead to my desire of losing 30 pounds.

The habits you need to establish in order to achieve an end desire of a happy, financially independent retirement are very straightforward: save with purpose; spend with discipline; stick to the plan. So if these are the habits we need, then how do we form them?


Fortunately, there is a ton of research on the topic of habit forming. After all, financial goals are hardly the only area that people need help establishing good habits for. The research pretty much universally leads to the same conclusion...if you want to establish a new behavior as a lifelong habit, you need to do it, and repeat it over and over and over again.


The basic rule of thumb is this—commit to small changes that are achievable, effective and that train your brain on the desired habit you are creating.  Stanford Psychologist B.J. Fogg, whose research on Tiny Habits is built around these principles, discusses this in terms of how he started his flossing habit. For him, it was about putting the floss right next to the toothbrush (thereby attaching the new behavior to an existing routine) and committing to himself that he would floss at least one tooth (that's right, just one tooth) every time he brushed. He allowed himself to floss all of them if he wanted, but to accomplish the goal, he just had to do one.  


In financial terms, one way to do this might be to change the way you save. Many people don't have any formal method for saving. Of those that do, many do it backwards—spending first and then saving some of what's "left over" at the end of the month. A small change here might be to save at the beginning of the month. You will feel empowered, not shameful. In control, not being controlled. And most importantly, you will train your brain to pay yourself first.


Sounds easy right? Unfortunately, research also shows it is more complicated than that. Sometimes part of establishing new good habits also replacing bad, less productive habits. In financial terms, this is applicable to most people's spending habits when it comes to credit cards. How often do you put something on a credit card without a plan for how to pay it off? If you are someone who spends first and plans second, then consider reversing the trend. If you want to go on a vacation and you don't have the money to pay for it, don't put it on a credit card (because you still don't have the money to pay for it) the cash, and then sail away.


Interestingly, Professor Fogg also points out in his research that motivation is not a key to establishing good habits. Sure, you need to want to do it, but beyond that it is more about design than it is about desire. That is why sticking to the plan is so important. You can design and implement a plan that works, that will help you achieve your retirement goals. But if you divert from the plan, don't see it through, you will not achieve success. That does not mean you don't adjust the plan. Of course you do. It does not take research to know you can't rely on the "toe in the water" to do all the work. The point here is to form the habit with small changes, and then go full speed ahead when resources allow.


All of that said, there is one sure fire way to risk not achieving success—setting an arbitrary numeric goal as the finish line in retirement planning. The finish line is always moving. Your needs are always changing. And frankly, there is too much unknown to ever be sure that your target will really ensure success. There just isn't a magic number. The sooner you accept that, the closer to success you will be.


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