Your Retirement Number Is Probably Wrong

Your Retirement Number Is Probably Wrong

For decades, retirement planning has revolved around one question:

“How much money do I need to retire?”

$1 million? $2 million? $5 million?

The problem is that there isn’t a universal retirement number.

A person with $2 million and a modest lifestyle may be in a much stronger retirement position than someone with $5 million and a very expensive lifestyle.

That’s because retirement isn’t funded by a portfolio balance. It’s funded by cash flow.

Stop Focusing on the Number

One of the biggest mistakes in retirement planning is treating a portfolio balance as the finish line.

Someone might say:

“I want $3 million before I retire.”

But why $3 million?

What if they only need $60,000 a year to maintain their lifestyle?

What if they need $150,000?

What if their spending changes dramatically depending on market conditions, travel plans, healthcare costs or whether they’re helping their children?

The portfolio balance matters. But what you need your portfolio to accomplish matters more.

Instead of starting with:

“How much do I need?”

Start with:

“How much will I actually need to spend?”

Your Spending Number May Matter More

Imagine two couples each retire with $3 million.

Couple A spends $80,000 a year.

Couple B spends $180,000 a year.

On paper, they have exactly the same amount of wealth.

Financially, they are living in completely different worlds.

That’s why a good retirement plan should identify your annual spending requirement and then determine how that spending will be funded through Social Security, pensions, investment income and portfolio withdrawals.

The goal isn’t simply to reach a large number.

The goal is to make sure your resources can support the life you want.

The Most Important Question: How Flexible Is Your Spending?

This is where retirement planning gets really interesting.

Not every dollar of spending is equally important.

Some expenses are non-negotiable:

• Housing

• Food

• Utilities

• Insurance

• Healthcare

• Taxes

Other expenses are more flexible:

• Travel

• Dining out

• Entertainment

• Gifts

• Luxury purchases

• Large discretionary purchases

That distinction can dramatically change the way you think about retirement risk.

A retiree who needs $100,000 every year no matter what the market does has a very different risk profile from someone who normally spends $100,000 but could comfortably reduce spending to $80,000 during a major market downturn.

Flexibility has financial value.

Your Retirement Number Should Have a Range

Instead of creating one arbitrary retirement target, consider thinking in terms of three numbers:

Your Floor

The minimum amount required to maintain your basic lifestyle.

This is the spending level you don’t want to compromise.

Your Target

The amount that allows you to live the retirement you’ve envisioned.

This includes travel, hobbies, dining, gifts and other lifestyle choices.

Your Stretch

The amount you could spend if markets, income and circumstances are favorable.

This might mean additional travel, helping family members, buying a second home or increasing charitable giving.

This approach creates something much more useful than a single retirement number.

It creates a retirement spending framework.

Retirement Isn’t a Static 30-Year Expense

Another problem with traditional retirement projections is that they can make retirement spending look perfectly linear.

Real life doesn’t work that way.

You may spend more during the first decade of retirement when you’re traveling and pursuing hobbies.

You may spend less later.

Healthcare costs could increase.

You might buy a new car.

Your grandchildren could create new expenses.

You may decide to help your children purchase a home.

Your spending will change because your life will change.

That’s why your retirement plan shouldn’t be a one-time calculation you complete at age 60 and forget about.

It should evolve with you.

The Other Number You Should Know: Your Income Gap

Once you know your spending requirement, you can determine how much income your portfolio actually needs to provide.

For example:

Desired annual spending: $120,000 Social Security: $50,000 Pension: $20,000

That leaves a:

$50,000 annual portfolio income requirement.

That’s a much more useful number than simply saying, “I need $2 million.”

Now you can begin asking the right questions:

How much can the portfolio reasonably support?

How should assets be allocated?

When should Social Security begin?

Which accounts should be tapped first?

Should Roth conversions be considered?

How much cash should be held?

How much spending flexibility should be built into the plan?

Those are the questions that actually determine retirement readiness.

The Best Retirement Plan Isn’t the One With the Biggest Number

There is a psychological temptation to keep moving the goalposts.

$1 million becomes $2 million.

$2 million becomes $3 million.

Then $5 million.

At some point, the question stops being:

“Do I have enough?”

and becomes:

“Enough for what?”

That may be the most important retirement-planning question of all.

Your retirement isn’t a number sitting on a statement.

It’s a lifestyle that needs to be funded.

So instead of obsessing over the size of your portfolio, start by understanding what your money needs to do for you.

Because your retirement number may not be wrong because it’s too high.

It may be wrong because you’ve never really defined what the number is supposed to accomplish.

A strong retirement plan isn’t built around a magic portfolio balance.

It’s built around your spending, your income sources, your goals and your ability to adapt when circumstances change.

Know your minimum.

Know your target.

Know your flexibility.

Then build the portfolio around the life you actually want to live.

The goal isn’t to retire with the biggest number possible.

The goal is to have enough financial freedom to live confidently—without constantly wondering if you’ll run out.

Click here to schedule a meeting — I’m here to help you take the next step toward financial freedom.

Colin Symons, CIO Lloyd Financial Group

If you’ve followed me for any reasonable length of time I’d like to think you’re aware that I prefer numbers to opinions. It’s easy to just have an opinion about something. For instance, some people have been convinced stocks are expensive, bitcoin is the only asset you have to own, and gold is the one true asset for a decade or more. Sometimes those opinions have looked great, other times, not so much.

The thing is, even with a numbers’ focus, you need judgement. For instance, I’ve been stubborn on holding some amount of crypto-stocks because we have good liquidity and this is a very friendly administration for crypto. That’s an idea that didn’t really start to get legs until recently, with a pretty good downtrend in there. Some numbers didn’t look great, but we held because what I was focused on hadn’t changed.

Ultimately, we all have opinions, it’s just a question of the source and what would change them. Another example is that I’ve had an opinion for a while that there was a real limit to how much higher real rates could go, as the government is actively fighting it, so the expression will be elsewhere, like a lower dollar. That idea has looked better, lately, but if we do make new highs in real yields, I’d likely shift.

Looking at conditions right now, there are a lot of divergent opinions, which you can see in part through option exposure. There are heavy bets SPX crests 7710, and there are also heavy bets we see 7610. Which is right? Nobody really knows, but there are a lot of events coming soon to drive us up or down. NVDA earnings on Wednesday and the Fed’s Jackson Hole meeting are likely highlights, but we also have PCE, GDP, payrolls, tariffs, Iran war news and more coming up.

Let’s look at semiconductors as a focus, as it’s driven a lot of recent volatility. We saw a massive move from April through June, taking the SMH semiconductor index from 363 to 669, an impressive 84% gain on an index that already had moved up a lot. Too much? Well, we’re almost 20% off those highs, so we’ve at least taken a break. For our part, we started trimming in the middle of that move. That looked dumb in the second part of the move, but smarter now. You never quite know what will happen, just have a plan.

We now know the upside move was likely exacerbated through aggressive moves by hedge fund Situational Awareness and its ilk, which subsequently exploded in July. Another way to look at that is sentiment became very high, basically euphoric. We’re still coming off of that sentiment high, as we bounced and crashed again, something which isn’t uncommon with events like this.

Does that mean the high is in? Maybe, maybe not. Growth in semiconductors is still high up on the charts relative to the rest of the market, and markets generally love growth. We’ve seen plenty of short-term swings up and down, the latest being today as, among other things, investors expressed disappointment in Samsung’s shareholder-return plan, sending shares -9%.

That has nothing to do with semiconductor growth, though, just continued positioning chaos. The next big event is Nvidia (NVDA) earnings on Wednesday. Considering how well-covered the stock is, I’m not going to pretend I have any great insights into what happens. I’d only say they’ve developed a recent history of post-earnings declines. That’s well-recognized, so the bar for upside seems pretty low.

On the downside, the bears have a point, as a miss would hit a big part of the market very hard. No wonder we’ve seen hedging activity. I think upside is more likely, but you have to recognize the risks. For our part, we already trimmed semiconductors on the way up, sold an associated name as the crash was going on, and are holding the rest into earnings. I think it’ll be fine, but the numbers admit to risks. Our opinion is upside seems better, here, but have prepared for being wrong.

Chicago Fed National Activity Index fell from 0.06 to -0.08, signaling below-trend growth. Production, sales, and consumer spending all fell, while employment improved. A value under -0.7 is where we talk about recession, and this is a lagging signal, but nothing to worry about, here.

Oil is -3% on news the US is talking to Iran about ending the blockade and sanctions relief in exchange for opening the Strait of Hormuz and addressing proxy attacks.

Treasury yields were lower on Monday as CNBC reported two Treasury officials said they could use their $1T General Account to ramp up government bond purchases.

Bitcoin crested $80K for the first time since May as the debasement trade continued, while precious metals also fell from overnight highs.

ADP Employment and New Home Sales today.

Bottom line: Peace overtures and a continued relaxation in long bonds are helping put a bid back into markets.

Click here to schedule a meeting — I’m here to help you take the next step toward financial freedom.

Disclosures/Regulation:

This content is intended to provide general information about Lloyd Financial. It is not intended to offer or deliver investment advice in any way. Information regarding investment services are provided solely to gain an understanding of our investment philosophy, our strategies and to be able to contact us for further information.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance is no guarantee of future returns.

Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable

Want a clearer view of where you stand? Schedule a free portfolio analysis.