Once a month, I share with 904 other Millennials a brief newsletter highlighting the best tips about money I've read.

Hi, I'm Kevin.

Once a month, I share with 904 other Millennials a brief newsletter highlighting the best tips about money I've read.

What You Already Know About Your Retirement

Financially Well

March 31, 2024

Our retirement feels so distant, so far in the future.

So our preparations feel like a leap. Like a leap into a complete unknown, hoping that something, anything will keep us aloft.

But our retirement finances aren’t a complete unknown. Even at relatively young ages, we have data to support those preparations. And that data can increase the chances we succeed.

Take historical stock market returns, for example. This data shows us that, in most cases, we can withdraw 4% of our investments annually for 30 years without running out of money.

We all want to figure out how to set ourselves up to retire in comfort, with the lifestyle we desire. But what do we know? We’re not experts. We can’t predict the future. And we’re so far away from the answer.

In the late 1800s, Orville and Wilbur Wright wanted to figure out how to fly. But what did they know? The Wright brothers owned a bicycle shop. They repaired bicycles. They, too, were so far away from the answer.

But they turned to what they did know to get there.

We’re not the first people to try to solve the retirement planning dilemma.

Others, before us, have experimented with different approaches. Our grandparents’ generation relied on company pension plans, receiving fixed payouts at regular intervals. Our parents, meanwhile, have leaned on strong stock market growth and home price appreciation.

Now, we’re tempted to shape our own strategies using these results. What if we’re relying on inaccurate information, though? The data inputs we use – about inflation, interest rates, stock market growth – may yet fail us.

So conventional wisdom feels insufficient.

The Wright brothers weren’t the first people to try to solve the human flight dilemma.

Others before them, like German engineer Otto Lilienthal, had experimented with different approaches. Lilienthal spent five years researching gliders and gliding. His work, The Smithsonian notes, “produced the best and most complete body of aerodynamic data of the day.”

Katherine White of The Henry Ford Museum shares what happened next:

“The Wrights shaped their wings based on calculations made by Lilienthal. The glider pioneer had created elaborate tables indicating just how much lift should be generated by a wing of a certain contour. Their first glider tests at Kitty Hawk, in 1900, were encouraging, but the wings did not produce as much lift as Lilienthal’s tables suggested. The Wrights returned in 1901 with larger wings, again shaped according to Lilienthal, but the new glider performed even worse.”

The Wright brothers’ data inputs had failed them. David McCollough, in his biography, Wright Brothers, explains:

“It was not just that their machine had performed so poorly, or that so much still remained to be solved, but that so many of the long-established, supposedly reliable calculations and tables prepared by the likes of Lilienthal, Langley, and Chanute – data the brothers had taken as gospel – had proven to be wrong and could no longer be trusted. Clearly those esteemed authorities had been guessing, ‘groping in the dark.’ The accepted tables were, in a word, ‘worthless.'”

We don’t know if “long-established, supposedly reliable” assumptions about retirement will work for us. The conventional wisdom should point us in the right direction.

But as Orville and Wilbur Wright learned, we need to make our estimations more personal. That’s the only way, ultimately, to reduce our specific financial uncertainty.

The Wright Brothers’ ultimate goal depended on more than third-party data and experiences. So they turned inward, toward what they already knew: bicycles.

“After their 1901 glider didn’t perform as expected,” The Henry Ford Museum says, “Wilbur and Orville Wright modified a bicycle to test the data used to shape their wings.”

First, they mounted a spare bicycle wheel horizontally across the handlebars of a bicycle. Then they rode the bicycle through the streets of Dayton, Ohio. The wind that the bicycle produced “simulated the air pressure against a wing in flight.”

The results didn’t conform to Otto Lilienthal’s data tables. The Wright brothers had identified the shortcoming in their process.

So instead, Wilbur and Orville calculated their own lift tables. And at the end of their own, personally-designed tests, the pair “had the most detailed data in the world for the design of aircraft wings.” “Their next glider, shaped by the new data, performed brilliantly at Kitty Hawk in 1902.”

Our ultimate financial goals depend on more than our parents’ economic experiences. So we must turn inward, too, toward what we already know: our spending habits.

Existing research shows that we should be able to withdraw about 4% of our investments annually in retirement. This data, while imperfect, indicates how much money we may need to save before we retire. But the exact amount depends on our spending.

A stable, comfortable retirement ties directly to the cost of our preferred lifestyle. That so-called “magic” retirement number you may hear about is quite personal. How much do you want to spend each year in retirement?

Using the 4% guideline, we can know that we need to save 25x our annual spending to retire. But we need to calculate our own data table.

Uncertainty will always cloud our financial future. We’re not without any guidance, though.

We may be taking a leap, but better self-knowledge – about our spending habits, in particular – can help to bridge the gap.