Retirement is about maximizing reliable cash flow for life
My husband is from Canada and often quotes temperatures in Celsius. When I’m trying to figure out how to pack for a trip, this can lead to some serious miscalculations. If he says, “Oh, it’ll be about 27 degrees,” I’m packing turtlenecks and scarves. But in Fahrenheit, that’s a balmy 80 degrees.
The lesson? Misinterpreting the data or using the wrong measurement system can cause you to prepare for a situation entirely different from the one you’ll experience.
Finance is no different. We love to measure, and our favorite tool is the benchmark. For many, that means comparing investment returns to the S&P 500
SPX
. But when it comes to retirement, that benchmark might be just as misleading as my Celsius-to-Fahrenheit mishap.
Read: Don’t get swept away by ‘S&P 500 envy’ as stocks shatter records and bonds lag
The problem with using the S&P 500 as a benchmark in retirement
The S&P 500’s returns are measured using time-weighted returns (TWR), which don’t account for cash flows like withdrawals. If you’re retired and withdrawing funds, comparing your portfolio to the S&P 500 might make you think you’re underperforming. In reality, your accounts could be doing just fine.
What truly matters is the internal rate of return (IRR), which reflects the actual dollars you gain or lose, accounting for your withdrawals. Unfortunately, many firms don’t report this way—they stick with the easier-to-calculate time-weighted metric.
There’s another catch: the S&P 500’s allocation likely doesn’t match your portfolio. If your portfolio is 60% stocks and 40% bonds, and the S&P returns 10% while bonds earn 4%, your expected return is about 7.6% before fees. But we’re human—we see the headline S&P 500 returns touted across the media and assume that’s what we should be earning, forgetting allocation differences and fees.
Read: Why 2025 looks like a great year to retire
When a static number becomes a static mindset
Some people don’t benchmark against the S&P 500—they benchmark against a number. This idea was popularized by Lee Eisenberg’s book “The Number: What Do You Need for the Rest of Your Life and What Will It Cost?” I’ve met plenty of folks who have a specific number in mind, convinced they can’t retire until their investments hit that target.
The problem? A static number ignores time. Retirement planning relies on the time value of money—the idea that when measuring funds needed, you must factor time into the analysis. When you account for time, because of inflation and a longer time-horizon, retiring at 55 might mean your number isn’t enough, whereas retiring at 75 might mean you overshot. In some cases, people keep working for years unnecessarily, thinking they need to hit a specific number.
A better way to benchmark
A less common but much more effective way to benchmark progress is by using a capital needs analysis. This approach, often used by pension-fund managers, calculates the present value of the assets needed to cover future cash-flow obligations.
For retirees, this means creating a detailed projection of your lifetime cash flow needs. Unlike a pension fund’s predictable payouts, your needs may vary year to year—healthcare expenses, home repairs, weddings, or a new car are examples of things that may crop up in an unsystematic way. A capital needs analysis factors in these periodic expenses and recalculates as they occur.
One customized approach to benchmarking is called “Critical Path,”—a process that measures your progress based on the asset level needed to maintain your lifestyle for your expected lifetime. This requires a comprehensive projection that includes savings contributions while working, withdrawals in retirement, taxes, and “lumpy” expenses like big trips or new vehicles. It also accounts for income streams like Social Security, rental income, or deferred compensation, which reduce the burden on your
investment portfolio……
By Dana Anspach
