A specific retirement magic number may not work for your timelines, priorities, or financial realities

Earlier this year, my six-year-old was sitting at the kitchen table, finishing breakfast. The house was quiet. He was quiet, too, which usually means he’s thinking.

Without any prompting, he asked, “How tall will I be when I’m older?”

I don’t recall exactly what inspired the question. Maybe he wondered what sport he’s most likely to play. Or how he’ll compare in size to his older cousins or (currently) taller classmates.

In any case, he asked me for a number. And in doing so, he expressed an interest in becoming more certain about an uncertain future.

But I couldn’t give him a specific, “magic” number. I could use certain assumptions, such as his growth curve, to give him an estimate. But certainty wasn’t possible.

This situation likely seems obvious to most adults. Even so, many of us still ask similar questions about our financial future. When we think about retirement, many of us desire a magic number, too.

Welcome back to Financially Well, the finance podcast for Millennials.

What is a Retirement Magic Number?

The “retirement magic number” concept likely dates to 2006. That year, former Esquire editor-in-chief Lee Eisenberg wrote a book on the idea, entitled “The Number: What Do You Need for the Rest of Your Life and What Will It Cost?”. In the years since, we’ve experienced the Great Recession, the rise of clickbait journalism, and most recently, high inflation. These events have stoked the financial anxiety that leads us to seek out a retirement magic number in the first place.

Almost anyone who devotes time to offering retirement savings tips to the general public has good intentions. And much of the professional, well-qualified advice — from spending projections to withdrawal rates — is sound in theory. Yet, trouble can arise when these voices fail to consider how one generation’s rule of thumb might not align with those that follow.

How Often Do Millennials Ask About a Retirement Magic Number?

Millennials, typically defined as the generation born between 1981-1996, understand that retirement savings are critical. They also understand the long-term benefits that saving and investing at a young age can provide.

Even so, most of my peers don’t even bother to ask me about a specific long-term savings target. True to the stereotype that Millennials lack financial confidence and/or knowledge, right? Quite the opposite, in fact. In my experience, Millennials are both engaged in and thoughtful about how to save for retirement. They’re also painfully aware that a retirement magic number often doesn’t mesh with their financial and economic realities. Even a recommended savings rate, often cited as 20 percent, may not fit their circumstances.

Why the Idea of a Retirement Magic Number is Flawed

Several journalists have thoroughly documented the variables that impact Millennials’ savings progress. But these stories struggle to complete amid flashier online competition. Rather, Millennials who Google a retirement question are more likely to find:

• Surveys of questionable rigor (“27% of Millennials have a money secret!”);
• Tone-deaf advice (“You’re Age 35: How Much Should You Have Saved for Retirement by Now?”); or
• Very technical writing (“Rolling After-Tax 401(k) to Roth IRA”)

These articles suggest that Millennials only need a little more financial literacy and discipline. Then they would enjoy the same financial stability that Baby Boomers did at a similar age. But in reality, constant headwinds hit many Millennials. And without better guidance, they’re forced to question and rethink almost every financial decision they’ve made, including the most prudent ones. Under these circumstances, money becomes purely a source of stress, without any positive emotions attached. From there, the Millennial thought process around money seems to split into two camps: dejection or rebellion.

Millennials’s Timelines and Priorities Don’t Fit Some Financial Rules of Thumb

What are the implications of a young adult feeling dejected about being off target for hitting a retirement magic number? In too many cases, this frustrated feeling leads to postponing difficult financial decisions. Such individuals are more likely to just stick with the status quo. They may do enough to check off their most essential financial responsibilities. But they don’t move much closer to living the lives that they truly want to lead.

The second group, a small minority, take a different approach. Relying on a fortunate combination of personality, life experience, and information, they reject the popular retirement narrative. And in turn, they offer the best glimpse into why Millennials view the traditional definition of “retirement” with increasing skepticism.

As economic realities, personal priorities, and cultural norms have changed, many Millennials have realized that the financial assurances on which Baby Boomers raised them no longer apply. Sure, almost everyone’s spending and savings habits could use some improvement. But focusing on small, absentminded purchases, such as coffee or avocado toast, misses the point. Rather, this generation has started to show that they’re not willing to indefinitely sacrifice the things in life they value or consider important. They’re not content to blindly follow a financial narrative that is producing different outcomes than when their parents were their age.

How Can You Find Good Savings Advice?

Millennials and younger generations will continue to hear how much they should save for retirement each year. They’ll continue to hear what they should have at certain ages, including that retirement magic number. Ideally, they’ll understand that this version of financial advice likely doesn’t come from a source that appreciates the context in which they now make financial decisions. I’m certainly not suggesting that savings goals are ineffective or unnecessary. But savings projections are highly dependent on so many factors outside of one’s control. And the articles that preach such rigid numbers often neglect to discuss this reality in any meaningful detail.

The Three Steps for Millennials Who Want to Save for Retirement

Instead, Millennials are most likely to build and maintain savings momentum if they reduce their emphasis on certainty and specifics. They should give more attention to the following three steps, over which they have more control:

1. Strong savings habits
2. Automating financial tasks
3. Gradual progress over the long-term

Even young adults who have significant student loan debt or pay for child care can contribute something to a retirement savings fund. For those with a 401(k) plan at work, I encourage a contribution that earns whatever match the company offers. For others, I have seen that an automatic contribution each month — in any amount — can establish a savings habit that endures as life and financial circumstances change.

Once a young adult implements these baseline activities, the key to more powerful savings rates lies in constant progress. Each new year or open enrollment period can create momentum for 1-2% increase in savings. Each new job change, salary increase, or bonus likewise can result in additional lump-sum or ongoing savings. And as life circumstances change — for example, if a child starting school reduces or eliminates child care payments — some percentage of the newly-available funds should shift to long-term savings. Even later in life, during the “empty nest” years, opportunities exist to boost retirement savings.

Rejecting the Retirement Magic Number Until Later in Life

Once in a while, a client will express to me an interest in a specific retirement target even if, deep down, he or she knows that their current financial circumstances won’t allow them to hit the target. Most of the Millennials couples I talk to don’t even broach the subject, usually because they’re focused on more time-sensitive issues. Even in that silence, though, I know they’re hearing the messages that tell them they’re behind. Just as a young child can’t know with certainty how tall he will grow to be, it’s time that we shake the retirement magic number concept. Instead, let’s focus on what we can actually control.

[Editor’s note: this article reflects the transcript (which I’ve edited for clarity) of a recent Financially Well podcast episode.]

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About the author: Kevin Mahoney, CFP®

Hi, I’m Kevin. I’m a financial advisor in Washington, DC. I’m also the founder of Illumint, an independent financial planning company in the District that specializes in financial planning for Millennials like you. I empower our generation with the confidence to invest an inheritance, financial gift, or extra savings. If you’re new to Financially Well, welcome – you now have access to the leading finance podcast for Millennials. I encourage you to read, watch, or listen to the ideas I’ve shared about making your money work for you. And then when you’re ready, please send me your thoughts & questions!