I Asked A Financial Adviser How To Figure Out My "Magic Retirement Number," And It's Complicated

It's all about the long game.

I've been putting money in a retirement account for years, but I have no idea if I'm on track or even what sort of number I should be shooting for. And I'm guessing I'm not the only one.

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Turns out, blindly saving is like boarding an airplane without knowing where you're going (and likely not packing properly).

It turns out there are some general guidelines out there, but there's no one-size-fits-all answer because — you guessed it — everyone's situation is different.

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According to Fidelity, you should "Aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67," but they note that these are broad estimates. 

Your magic retirement number (✨) is dependent on what age you plan on retiring and the lifestyle you hope to live in retirement. This is where the pros come in.

To help us all, I chatted with a financial adviser who told me how you determine that magic number and how to get there.

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Ashley Russo, a wealth management adviser with Northwestern Mutual, shared what she takes into account when working with clients who are saving for retirement.

1. To start, you need to reframe how you think about retirement — it should be the first thing you think about, not the last.

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I assumed there were a whole bunch of boxes you should check before you started thinking about retirement — things like setting up an emergency fund and creating a budget. Turns out, it's best to think long term and let that determine your present.

"If you think about your destination it can guide your path and give you a roadmap," explained Russo. "Thinking about retirement first can redefine the goals in your life."

2. It may help to think of retirement as the money you'll need to save now to give yourself a paycheck later.

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According to Russo, "Your savings today creates that paycheck later," meaning that what you save now will determine what you can "pay yourself" in retirement.

3. That being said, you're never too young to start saving for retirement.

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If you're young and healthy it might seem counterintuitive to put money in an account you won't touch for decades, but Russo notes that thanks to compounding interest (aka money you make off your money), "Time is the most powerful tool we have in finance."

For example, if you put $1,000 in a savings account with a 5% annual interest rate at age 20 and forgot about it until you were 60, you'd have $7,039.99. If you put the same amount in the same account at age 30, you'd have $4,321.94 by age 60. Just by squirreling away that money a decade earlier, you get an extra $3,000 (well, technically $2,718.05).

Now, imagine what that final number would be if you put $50 in that account every month for the rest of your life.

Moral of the story: Start saving early and start saving young.

4. But if you haven't saved a cent, don't freak out, you'll just need to adjust a couple things.

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If you pushed the thought of retirement into a far corner of your mind and forgot about it, you're not alone. According to the 2018 Report on the Economic Well-Being of U.S. Households by the Federal Reserve, almost 25% of American adults have no retirement savings. But Russo says that "Even if you're in your 50s and 60s it's never too late to start saving." 

Because you have less time to save money and build up compounding interest (see above) you might need to cut back on other expenses so you can put more money toward retirement. You'll also probably have to hold off on dipping into your retirement fund until later on.

5. Before you do anything, ask yourself these two questions.

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Surprise! Retirement isn't one-size-fits-all, which means that magic retirement number (the amount of money you want to have saved) is different for everyone. The good news is that these two questions will help you figure out your magic number:

1.) When do you want to retire? Do you want to work until you die? Retire at 67 or retire even earlier?

2.) What does retirement look like for you? Do you imagine maintaining your current lifestyle? Living large? Or living a simpler life? 

6. Then, use your monthly budget (how to make that, here) to figure out how much money you can afford to put toward retirement.

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Your budget — where you plug in your monthly income and expenses — will tell you what sort of extra money you have to put toward your retirement (if any). 

"The budget helps us understand the surplus," says Russo. By using the budget, she says you can "rework lifestyle to get to retirement." That means figuring out how much extra money you have once your bills and expenses are covered (if any) or reworking your monthly spending so you actually have a surplus.

That "surplus" should then go toward your retirement. (Just keep in mind, it might not be enough and you might have to rethink your spending.)

7. You can also use your budget to figure out what sort of lifestyle you lead — which may clue you into what sort of lifestyle you'll want to lead in retirement.

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Believe it or not, your lifestyle now (and how much you spend to maintain it) can tell you a lot about what life may look like in retirement. If you like to go out to eat a couple times a week now, chances are you will also like to do that when you're retired. 

That being said, Russo says some people know that they want to live more lavishly in retirement, while others dream of "moving to the farm, selling everything, and living a simple lifestyle." 

She notes that you need to be honest about what type of lifestyle you envision for yourself in retirement. If you're not sure yet (join the club), Russo says you can base everything off your current budget and adjust as you go.

8. When coming up with that "magic retirement number" you'll also need to factor in lifestyle flexibility and added healthcare costs.

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Russo says that for some retired people "Every day is a Friday, not a Tuesday." In other words, you're more likely to live life like you're on vacation when you retire — another round of martinis, a first-class plane ticket, a hotel room upgrade...you get the idea.

Because of that mentality, you might need to account for a little extra wiggle room. You'll also need to take added healthcare costs into consideration. A Department of Health and Human Services survey from 2016 found that people aged 18–44 spend an average of $2,985 on healthcare a year while someone aged 65+ spends $11,316. That's an increase of over $8,000 per year.

9. And, of course, your age, inflation, and the stock market play a role.

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To find that magic retirement number, you have to take into account your age — because when you start saving and when you'll retire make a difference. You also have to consider inflation, because as Russo says, a cup of coffee won't cost the same amount in 5, 10, or 30 years. 

And finally, because your retirement savings will be invested through a 401(k) (employer-sponsored retirement account) or IRA (individual retirement account), you'll need to take into account the ever-changing stock market.

"We run analysis that stress tests the market so we take a very fair view at overall returns," explains Russo, who notes that the market's ups and downs shouldn't be a source of stress. "It doesn't really matter if it's meant for the future us — let it ride the wave." In other words, it's totally normal for your retirement money to surge and dip; you're playing the long game. 

10. You should put your retirement savings into a special retirement account, not a regular savings account.

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According to Bankrate, the average interest rate for savings accounts in October 2021 is 0.06%, which is...not great. Russo explains, "It's always best to use accounts that allow for growth with compound interest — traditional savings accounts don't compound the same way." She goes on to say that it's "always best to use retirement vehicles if you’re saving for retirement so you get that compound growth and tax advantages."

A retirement account invests your money into things like stocks, bonds, and mutual funds, which allows for more growth than a savings account. 

The most common retirement account types are a 401(k), a traditional IRA, and a Roth IRA. A 401(k) is an employer-sponsored retirement account. And since your employer may match the money you contribute (to an extent), you can increase your savings quickly. A traditional IRA functions like a pension with nice tax breaks and will restrict how and when you can access the money. A Roth IRA functions a bit more like a regular investment account and has fewer restrictions (and fewer upfront tax breaks).

11. Diversify how your retirement money is invested, then decide when you want to pay taxes on that money.

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When you start putting money in a retirement account, you'll need to answer a series of questions that will determine where your money is invested (stocks, bonds, mutual funds) and how aggressively it is invested. Not putting all your eggs (or in this case, money) in one basket is key.

Then, you need to think about taxes, both in the short and long term. If you put all your money in a 401(k) or a traditional IRA, you'll pay taxes on the money when you withdraw it in retirement. But with a Roth IRA, you pay taxes on money now so you can withdraw it tax-free later.

So you have to pay taxes on the money no matter what, but you can decide if you want to pay those taxes now or in retirement. Tax diversification comes into play if you have multiple accounts. For example, if you have a 401(k) through work (and will pay taxes in retirement) and want to supplement those savings, it might be smart to open a Roth IRA, which will charge you taxes upfront.

The goal is to get to a place where "We're not just diversified across assets, we're diversified tax-wise too," says Russo. "Tax diversification is beyond important because you want to be able to have some control over your taxes. Whatever you do now influences your taxes later."

12. Revisit your retirement plan at least once a year.

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As you change, what you want in retirement may change. To keep your plan (and magic retirement number) in alignment, you should revisit it at least once a year. 

13. And remember that by planning now, you can roll with the punches when things inevitably change.

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Say you lose your job, the stock market crashes, or you have health problems — well, according to Russo, "If you planned correctly, life can throw whatever it wants at you and you should be able to get through it from a financial perspective."

14. Since retirement — and figuring out your magic retirement number — is so complicated, your best bet is to talk to a financial adviser.

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I know, I know, if you're like me, you want to figure out this retirement thing on your own. But as you can see, this stuff isn't easy.

"If you talk to a financial adviser, it can demystify the process; they can help you build a long-term plan and customize what your retirement looks like," says Russo, noting that "a financial adviser's job is to tell you what your number is."

Your financial adviser will also check in with you every year (or more) to reevaluate your retirement plan and to make sure you're still on track.

"Typically, we are meeting with our clients every six months and asking the same questions — have your wants changed, have your goals changed, have your cash needs changed — and it's our job to evolve with them," says Russo.

Are you saving for retirement? Share your tips and strategies in the comments!

And for more stories about life and money, check out the rest of our personal finance posts.