Northwestern Mutual
Don't Save To A Number, Focus on Monthly Retirement Income Needs Don't Save To A Number, Focus on Monthly Retirement Income Needs
< Back to Insights & Ideas

Don't Save to a Number, Focus on Monthly Retirement Income Needs

Rebekah Barsch •  January 21, 2015 | Your Finances

You probably know how much you have saved for retirement. But do you know if that nest egg will generate enough monthly income for you in retirement?

I often make a simple suggestion when talking about saving for retirement: Focus on what you’ll need, not what you’ll have.

A great example I like to share is the story of a client who was unhappy in her career. She had built up her retirement savings but didn’t think it could support the lifestyle she wanted in retirement. Because she was unsure about her ability to retire, she planned to continue working.

But then she met with her financial advisor, who showed her the kind of monthly income she could reliably generate with her savings. She turned in her resignation the next day. She even invited the advisor to her retirement party.

The story emphasizes why we need to shift our mindset when it comes to saving for retirement. We’re so used to focusing on the size of our retirement savings that we often miss a crucial part of the equation—how our savings will translate into a sustainable cash flow to meet our retirement expenses. Yet without understanding how much income your nest egg will generate, how do you know whether you’re saving enough to meet your needs?

Start by envisioning your retirement. Do you want to travel? Go out to dinner more often? Spend time with the grandkids? Donate to charity?

Once you have your vision, you can draft a retirement budget that will give you an idea of the monthly income you’ll need to support your lifestyle. Then you can base your plan to save for retirement on the amount of monthly income you need and want.

Here’s an example:

Mike and his wife, Julie, are currently 50 and 51, respectively. They plan to retire together when Julie turns 65. Based on their vision, they anticipate they will need $10,000 a month in retirement. Here is their current situation:

  • Combined annual income: $250,000
  • Current retirement savings: $706,552 (401(k), IRA, investments and savings account)
  • Savings rate: $30,385 per year
  • Rate of Return: 6 percent1

A financial professional can run an analysis to help predict how much monthly income Mike and Julie can expect in retirement for as long as they live. We typically run this type of analysis with a 90 percent probability of success.2 For Mike and Julie, based on their current situation, they can expect a monthly income of $8,377.3

The good news is that they still have time to make adjustments and increase their monthly contribution to savings. This is where working with a financial professional can help. He or she can help you put together a plan that makes use of the most tax-efficient savings strategies.

Bottom line: While the size of your nest egg is important, the amount won’t matter if it doesn’t generate the income you need in retirement. The simple shift in mindset from the amount of your savings to monthly income can give you confidence that you’re on track to meet your goals.

1 Rate of Return is hypothetical, not guaranteed  and does not represent any specific type of investment.

2 Based on Monte Carlo simulation, a problem-solving technique used to test the probability of outcomes by running repeated hypothetical simulations randomizing not only economic events such as inflation, investment returns or losses, but also the risks of living longer than expected.

3 Projection is hypothetical, does not reflect actual investment results and is not a guarantee of future results.

Rate This Article