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Saturday, July 13, 2024

How to calculate your retirement number

How to calculate your retirement number


When you hear “retirement number,” most people think about how much money you need to save to meet your retirement goals. Having a specific retirement number can feel comforting. It provides you with a seemingly concrete, attainable goal.

But is one definitive figure truly valuable in the context of planning for retirement?

We’d love to say “yes.” But it may be an oversimplification. Identifying a perfect retirement number is just too simplistic to be realistic — at least for most people. The retirement-number concept caught on precisely because it is so simple. Who doesn’t want to plug in a number, reach that number, and then move into the golden years without a second thought?

Sorry, folks; it’s usually not going to be that straightforward. It is crucially important for investors to understand the true, more complicated nature of retirement.

Stuff happens

Life is full of unexpected events, and that won’t change when you enter retirement. In fact, if you plan to retire at 65, you could spend 20 years or more in retirement.1 Just think how things can change over the span of two to three decades.

In 2001 (more than two decades ago from this post), the first installment of the Harry Potter film series was released, and seeing it in theaters would have cost you $5.65. In 1991, the film Robin Hood: Prince of Thieves was released, and the average U.S. ticket price was $4.21. Compare that to the average price of a movie ticket today — more than double the price at around $9.50 a movie.2,3

Beyond inflation, there are sundry other aspects to consider. Let’s say you retire with $1 million. You’d have a very different retirement experience depending on whether the stock market crashed the day after you retired or soared for the first decade of your retirement. Likewise, health problems or family issues could change your outlook on financial security. Even overspending during the early years of your retirement could throw a wrench into your plan.

These are great examples of why the highly simplified “retirement number” can be misleading — and possibly even dangerous — to your future financial security. A much more realistic approach is required.

Introducing Monte Carlo

Monte Carlo simulations are mathematics-based analyses that attempt to make sense out of ambiguity and random variables.4 In other words, your retirement.

The concept of a retirement number makes planning appear to be black and white, but retirement planning is anything but. Monte Carlo simulations can help to add the necessary nuance that gives you actionable knowledge.

These simulations use details based on your existing situation to analyze thousands of hypothetical retirement scenarios to determine your likelihood of success.

For example, let’s say you want to retire at 65, you want to maintain your current lifestyle throughout your lifetime, and you want to do so using the assets you’ve already accumulated. A Monte Carlo simulation will run thousands of hypothetical market scenarios (thereby playing out situations in which the market tanks, or roars, shortly after your retirement), and combines those market possibilities with your desired and planned cash flows. Empower’s Monte Carlo software uses 5,000 scenarios. In the end, you will receive a probability-of-success ranking of low, medium or high.

There are many individual levers you and your financial advisor or other financial professional can pull to help make your situation one that has a higher likelihood of success. For example, you may discover that you have a medium probability of successfully meeting your retirement goals.

To potentially improve your probability of success, you could:

  • Delay your retirement.
  • Save more each year before retirement.
  • Reduce your planned retirement spending.
  • Adjust your investment strategy and risk profile in the hopes of higher returns.

You could pull any or all of the levers to work toward increasing the probability that your investments will sustain you throughout your retirement. Or, you can stick with your plan and acknowledge that some flexibly on your part may be required. This could mean actions such as:

  • Downsizing your lifestyle later in your retirement.
  • Working a part-time job.
  • Moving in with family.

The choices you make entirely depend on your personal comfort level with flexibility.

How do you run a Monte Carlo simulation on your own retirement portfolio?

You can do it easily, securely and for free by signing up for Empower’s free financial tools. Within your Empower dashboard, you’ll gain access to the Retirement Planner, a retirement calculator that will allow you to run a Monte Carlo simulation based on your current portfolio and other major financial events that you input (like a home purchase, when you plan to take Social Security and more). The robust financial tools aggregate information from all of your financial accounts in one secure location. This allows you to track your net worth, budget for short-term goals and analyze your investments.

It’s completely free and takes just a few minutes. Unlike seeing Harry Potter in the theater.

Planning for retirement is an ongoing process

As you may have guessed, Monte Carlo-style planning is never done. Unlike a static retirement number, your actual life scenario is constantly changing. Your probability for retirement-goal success changes constantly, too. For example, inflation is a huge potential variable for retirees. Monte Carlo simulations can help you monitor the consequences, if inflation becomes a significant factor.

No one can predict the future, not even the best Monte Carlo simulations. However, a mathematics-based approach to retirement planning can give you a realistic picture, which is an excellent starting point. The goal is to understand your situation and continually work toward improving it. If you use Monte Carlo simulations, you won’t be hitting the retirement switch and checking out. Instead, you can have a greater sense of control because you’ll be continually evaluating the impact of new information and adjusting as needed.

Our take on your retirement number

You’re not a number. Your approach to retirement planning shouldn’t be, either. If you want to develop a retirement plan based on your personal financial reality and adjust as your life circumstances change, you may benefit from support. Empower’s financial tools give you access to the Retirement Planner, a comprehensive retirement calculator that will help you plan for several scenarios. Review your retirement plan at least annually so you can make course corrections if needed, and consider consulting with a financial professional on your plan.

1 The Motley Fool, “How Much Do I Need to Retire Comfortably?” June 2022.


3 National Association of Theater Owners, 2022.

4 Investopedia, “Monte Carlo Simulation,” October 2021.


Paul Deer, CFP®


Paul Deer is the Vice President of Wealth Private Client at Empower. A CERTIFIED FINANCIAL PLANNER™ professional, he has over a decade of industry experience, and leads a team of financial advisors serving Empower clients.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. No part of this blog, nor the links contained therein is a solicitation or offer to sell securities. Compensation for freelance contributions not to exceed $1,250. Third-party data is obtained from sources believed to be reliable; however, Empower cannot guarantee the accuracy, timeliness, completeness or fitness of this data for any particular purpose. Third-party links are provided solely as a convenience and do not imply an affiliation, endorsement or approval by Empower of the contents on such third-party websites.

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