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Retirement alert: "What's your number?"

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“What’s your number?” the conventional financial planner asks, and what he means is How much money will you need to retire? But this question may be terribly misleading as a basis for retirement planning. The underlying assumption is that no one wants to experience a significant drop in standard of living. The assumption is that the would-be retiree’s goal is what economists call “consumption smoothing” or a level rate of consumption.

The goal of consumption smoothing is the reason we save money at all; without it, we would spend every cent we earn as soon as we earn it. Whether we achieve or do not achieve the assumed goal of a level standard of living by retirement age may be due to such factors as self-control, anxiety about needing money in the future, bad or good luck or simply the fact that finding one’s retirement “number” is so difficult.

To try to find that number, we can add up all our expenses now and determine how much we will need in retirement. But if we are living very well now, we may require a huge sum, and therefore be required to cut back now in order to save for tomorrow. Or the opposite might be true. We might be saving excessively now, so that when we retire, we will need to up our spending in order to justify having saved so much.

Here’s where the motives of the financial services industry comes in. The financial industry wants us to have a huge number because then we will hand over a huge chunk of assets, and they will be able to charge huge management fees. For example, Fidelity’s My Plan, sets a target of 85 percent of pre-retirement income, which is far too much for the average household. And Fidelity is not alone in this.

With a target is so high, it soon becomes apparent that you will never be able to achieve your goal with a conservative investment approach. And this is where Fidelity (and many others) oblige by informing you of their more aggressive investment options, which may give you a shot at the goal.

And this is how the financial industry induces us to buy riskier investments, which coincidentally carry higher fees, in an attempt to reach these artificial, industry-created investment goals. And, the downside of risky investments can be the ruin of your retirement plans altogether.