By Robert A. Stabile, EA, ABA
The Simple Way to Find Your Retirement Number — The Motley Fool
What’s Your Retirement Number? – The Balance
The One Retirement Number You Need To Know – Forbes
What’s the magic number for your retirement savings? – CNBC.com
What’s my ‘number’? Figuring out a retirement target – CNN Money
…..These are all web links that lead you to an article describing on how you can find the right number, amount of money that is, to help you live a successful retirement! But is this really the correct way to approach retirement? That’s the focus of this month’s discussion.
As I reflect on the financial view of our clients ages 30 to 50, the way they think about retirement is fascinating. It’s been said before in national magazines that we should “retire” the word retirement. Why is that? Because it really doesn’t mean much anymore as the landscape of work, family and the economy are constantly changing. There was a recent study done in USA Today, (www.usatoday.com), that suggested 68% of individuals working today said that they would continue working into retirement. In fact, I myself, will live what I call a “hybrid retirement,” meaning that I will work in some part time capacity to keep me busy and my mind limber.
You can see from the web links above, it has been the trend to concentrate on the approach to retirement as seeking the appropriate “number” where it comes to retirement. This financial planning notion centers on the concept of figuring out how much money you will need in your investment portfolio, (whatever that is), on the day you stop working in order to provide you with enough income for the rest of your life. It’s the magic number you will need so you will never run out of money. In retrospect, I am absolutely convinced that this approach to planning retirement is severely flawed. In addition, reaching this number, if you are so fortunate, may in many cases put retirees in the state of paranoia as they age through retirement.
I believe that a better approach would be to search for “what’s my paycheck” not “what’s my number.” This is a very different direction from which traditional planners may take. Tom Hegna discusses in his book, “Paychecks and Playchecks Retirement Solutions for Life,” that we should seek paychecks first and then plan for our Playchecks.
Think about this for a minute. You work hard and begin to earn more and more income as you grow your career. You are quite successful in that you save the maximum in your 401(k) plan,
take the company match, you may even be showered with stock options for twenty to thirty years. You invest your money wisely and achieve a reasonable rate of return on the money. Your financial advisor runs a detailed analysis and now you have a goal of $2,000,000. They tell you upon hitting that $2,000,000 that you will never run out of money if you use a certain withdrawal rate, earn a certain interest rate, and the variable assumptions like inflation and tax rates stay in line.
What’s wrong with this analysis? The item that nobody discusses is that by achieving this level of success, you are guaranteed to spend down your money. So, what happens psychologically is that the first few years of retirement you hit a sensation of jubilation. You start living your “Go- Go” years and you spend more money than you would in normal years living out some of your bucket list. After all every day is a Saturday in retirement. Isn’t that traditionally when you spent the most money in your pre-retirement years? So, after you come down to planet Earth from your couple of years of travel and vacation, you start to withdraw money at the reasonable spend down rate.
The problem is that when some people spend their lives building up a capital base, it makes them emotionally sick to their stomach to see the balances in their investment accounts begin to go down. While intellectually they understand that this money was built up for this very purpose, it is impossible for them to sit by idly and watch the capital base dissipate because they spent their whole lives building it up.
This is why you’ll often hear that people who have a lot of money in retirement are often some of the cheapest people in the world. The reason is the massive fear of the treasured money slipping out of their hands. I call this living a just in case retirement. “I can’t do this or can’t do that just in case… ” I am sure you know a few of these people. The result… the result is they begin to shrink their lifestyle to the point that their investment account balances stabilize or wont’ go down. This is counter intuitive to what should be happening.
Therefore, for those of you in your 30’s, 40’s, and 50’s who are planning now for retirement should understand that the discussion should be around ‘what’s my paycheck’ and not ‘what’s my number’. Some of the happiest retired people I have seen throughout my career are teachers, government workers, and clients who receive steady pensions from their former employers and have a substantial nest egg to spend as well. They don’t think emotionally as much about the market, the economy, or the Government around their future or their investments.
All they know is that a check comes in the mail each month. Month after month after month for the rest of their life. In other words, they keep getting a “paycheck” for life! That means as you plan your family finances, you should have a really strong consideration on what percentage of your assets that you are willing to allocate to a real pension like paycheck in retirement. There are many types of products that can solve this part of the equation. You should ask your financial advisor about how these types of instruments work within the framework of your retirement plan.
Should someone ask the question, “if you had 2 or 3 million dollars in the bank when you retire, do you think you would be happy?” Most of you would unequivocally say yes, but 10 years into retirement you would discover that your emotions would take over and you would be worried about your capital base every single day.
Therefore you should about the new notion of retirement being about a paycheck and not just a lump sum. If you knew the check was in the mail every month, how much fun could you have and not worry about the ups and downs of the economy every day. Isn’t it time you figured out what your paycheck should be in retirement?
Next month discussion will focus on the “playchecks” part of the “Paycheck and Playchecks.” This is where you should count on your investment portfolio to help you “play” and combat inflation during your retirement years!