Why I object to 'hitting a number' for retirement

When someone says they're retiring because they "hit their number," my alarm bells go off because it's often a signal that the retirement plan isn't as holistic or risk-conscious as it should be.

Too often, people use a simple heuristic like the 4% guideline to determine their portfolios' viability. Or worse, they're using their gut reaction to the number. A $1 million portfolio seems like it should be plenty, but it might not be if your tax-adjusted, inflation-adjusted spending is too high.

Dividing your number by your planned withdrawal amount is a good starting point to evaluate whether your plan is on track—for example, if you're 10 or so years from retirement . But if you're getting closer , it's worthwhile to create a more encompassing plan. Consider your:

1. Retirement spending versus spending while working 2. Nonportfolio income, like Social Security, a pension, or working income 3. Planned spending rate and portfolio positioning 4. Taxes, inflation, and investment costs

1. Retirement spending versus spending while working

2. Nonportfolio income, like Social Security, a pension, or working income

3. Planned spending rate and portfolio positioning

4. Taxes, inflation, and investment costs

If your assertion that you have enough to retire rests on a single variable—your portfolio's value—that's your cue to develop a comprehensive plan.

Risk also factors into my reflexive aversion to "hitting a number," especially if someone hits their number in the stock market. Stocks go up more than they go down, and it simply feels better to switch from savings to spending mode when your portfolio is looking robust. Counterintuitively, if you plan to retire with a heavy complement of stocks, it's actually better to retire after the market has been pummeled than to go out on a high note.

Valuations are the main reason. Even as your portfolio has gotten plumper, it's also more susceptible to sequence risk , the possibility of big portfolio losses at the beginning of retirement. In our research on safe spending rates , we found that nearly two-thirds of all-equity portfolios that experienced losses within the first five years of retirement ran out of money before year 30.

Our research on historical safe withdrawal rates also points to the value of retiring when conditions look crummy rather than retiring when your portfolio is riding high. In the mid-1980s, most investors probably weren't excited about the prospects for the major asset classes. Not only had stocks endured a punishing rout in 1973-74, but they also posted losses in 1977 and 1981. Bonds performed abysmally, too, thanks to the Federal Reserve's successful campaign to tamp down inflation. But the mid-1980s were actually one of the best periods in modern history to have retired into. An all-equity portfolio would have supported a starting withdrawal rate of nearly 13%! That's right, a $1 million portfolio would have supported a $130,000 withdrawal in year one of retirement, with annual inflation adjustments thereafter, for 30 years. Those rich withdrawal rates were owed to low equity valuations coming into the period, supporting strong stock market gains over the ensuing 30 years. Bond yields were high and trended lower, boosting bond prices, and inflation was generally quite mild.