Know Your Number

Know your numberWhen saving for retirement, how critical is it to know your number?

Fidelity, ING and many other Wall Street based financial institutions stress knowing your number. But is that the right way to go about planning for retirement?

In a recent Harvard Business Review article, Nobel Prize winner Robert C. Merton argues that this is exactly the wrong approach to retirement planning. Why?

Decision making, especially decisions about our money, are full of behavioral bias. With the shift from an income-focused retirement planning approach, like pensions and defined benefit plan use, to a rate-of-return-focused retirement planning approach asking questions such as “how much can I make in my 401(k) or what is my number?”, savers are pushed to take on more and more risk, which means more exposure to market loss. The result can be catastrophic if your timing is off just a little bit.

I agree with Mr. Merton that our focus should shift back to an income-based retirement planning approach. Instead of striving to take on more and more risk, a retirement plan should determine how to generate sufficient risk-free income to support your lifestyle during retirement, because the ultimate goal of your retirement plan is to provide income regardless of how much capital you have saved for your retirement.

Maximizing income from your investments is a very different investment approach, requiring very different investment strategies than maximizing rate of return.

At TFG Wealth Management, we specialize in developing and implementing retirement income plans. But unlike the Wall Street crowd that is limited to market-based solutions or the typical annuity salesman that wants to put all your money into an annuity, we use investment options from all sources, banks, insurance companies and the market.

So when I say know your number, it’s not about how big your retirement account is.  Rather, it’s about how much income you can generate from your retirement savings.

Interested in discussing ways to maximize your retirement income?  Give our office a call at 215-968-1755.