The Latest Retirement Magic Number

How much money do you need to save for retirement? It’s an easy question that’s hard to answer. It involves predicting the future, so a number of assumptions have to be made about the future. How long you’ll live and the rate of inflation are not the least of them. The latest work on the subject is from a couple of finance people who take the position that you want to be positive about having enough money for retirement. That means investing safely and with inflation protection. In other words, it means keeping your money in Treasury Inflation-Protected Securities (TIPS) and giving up the potential for higher long-term returns in order to protect yourself from mark downturns and inflation.

Of course, that means you’ll have to save an awful lot of money for retirement. They estimate your nest egg should be about 22 times the annual income you want. So, for a $100,000 income, you need to save $2.2 million. You should view this as the most you’d have to save. If you want to make less conservative assumptions or expect a better financial future, you could get away with less money. Also, the study doesn’t include strategies such as tapping your home equity through a reverse mortgage. Here’s a review of the study and a comment on it.

How would you manage such a plan to ensure that it never came up short?

You would consistently fund it with ample savings, invest patiently in low-risk assets and structure the payouts to provide steady income during a long retirement.

Some pension plans themselves have come up short, but only because they promised too much in benefits or set aside too little in assets, say Messrs. Sexauer and Siegel.

Individual investors, Mr. Siegel says, don’t face the same pressures to fudge the numbers.

Many people working today are likely to live to the age of 100 or 105, says Mr. Sexauer. So if you work for 40 years, from your mid-20s to around the age of 65, you ought to plan on accumulating enough savings to last for up to 40 years of retirement.