How Much is Enough?
We all love quick formulas and everyone wants to know what the magic number is. How much is enough to retire? How much should I have saved for my age,
status, salary, etc.? These are questions I get asked a lot and the answer is “it depends”.
One couple’s story….
Recently, we had a new client come in for their webcast to review their expenses and net-worth worksheet with my company’s financial planner. The wife sat down in my office while her husband was in the hallway talking on his cell phone. I mentioned to her that their goal of his retiring in 5 more years may be delayed as they were spending just about $1million a year. She immediately told me
I nodded and silently prayed that our planner had put in all the correct details. We had hired a bookkeeper to go to the client’s home and put an entire year’s expenses into Quickbooks so we should have been working with good data. When they sat down and we began to review the line items in their budget worksheet, sure enough, they were spending a bit over $900,000 per year. The husband had founded a company, sold it and was now running a division. But they were a bit like a kids in a candy store and had gone on a real estate spending spree. They had 5 homes to maintain, as well as 3 kids to put through private school.
Despite a net-worth most people would envy, they were going to have either pare back spending, work a bit longer, or sell a personal residence at some point to
become more liquid. So their “how much is enough” would be drastically different than a couple spending $150,000 a year or someone with double their net-worth spending what they were spending.
We find most people do not have any idea how much they really spend. The hardest piece of data for us to get from new planning clients is their expense sheet with all the columns filled in!
A rule of thumb…
We all love easy formulas so here is one you can use to guestimate how much is enough. The rule of thumb used by many financial planners is that you can safely withdraw 3% annually from your liquid savings. This, of course assumes that
you are earning a greater return and only withdrawing from income. In the current market environment, that can be a difficult goal to achieve.
This can be a very depressing or scary number for folks to face. $1 million dollars would theoretically only generate $30,000 per year. That is not a
large sum for the average family to live on and a paltry sum if you live in a
high-tax, expensive area like NYC or the surrounding suburbs. Lots of folks counted on their homes being part of their retirement plan but the average home is not rising in price in many areas. Many also hocked their home
by taking out home equity loans to put the kids through private school or
college. Now the home may be underwater so no easy moves there.
Social security or insecurity….
There’s been a debate in the planning community on whether or not to include social security in the projections we run for clients. My personal opinion is that most clients 50 and under should not count on the full social security benefit being there. Social security is drastically under-funded and the demand is greater than ever before. Many people who are not being counted in the unemployment numbers are collecting social security in some form. This drawdown in large numbers along with the government’s refusal to come up with a game plan to fix the system means that the higher net-worth clients should assume social security may get taxed or reduced in some form during their retirement.
So if you take out the $14,000 -$20,000 that many are expecting to receive in social security benefits, you must create enough wealth to replace that income stream.
I am going to work forever….
That’s another phrase I have heard from many. My response is “great! Who is going to hire you?” If you are self-employed and still have your faculties, you may continue to work and bring in a nice income. However, if you work for someone else, at what point are your skill sets either not up to speed or you are too expensive relative to a less experienced, but eager and hungry 20-something year old?
If you are planning on collecting social security, the amount of income you can earn without those benefits being taxed is very limited. So think through these plans and be realistic:
Don’t do the ostrich…
Face the music.
Figure out how much you spend.
There are many programs you can use which are free online or inexpensive
to purchase if you do not want to hire a professional to project forward with
The rule of 72.
Whatever return you earn, divided into the # 72 will give you the number of years before your money doubles. So if you earn 7% on your investments, your savings will double every 10 years. This also works with inflation. If you assume inflation is 3% (we use 4% as we would rather be conservative) your spending will DOUBLE in 24 years. If you are healthy and plan on living a long and fun filled “retirement” you will need to prepare for the increase in your core expenses.
Know what you own.
We all have our responsibilities within the family unit and I find money is
generally the province of one spouse. Both partners should have a basic understanding of how much they have saved, what overall asset allocation is being used for investing and how much is retirement versus non retirement.
Track Your Performance.
I cannot tell you how many people have no idea how their investments have done or what benchmark they should be using to determine if they are receiving an appropriate rate of return. The same couple I referenced previously had a significant sum of money with a large NYC firm. We began their process close to
year-end. I reviewed their portfolio and was shocked to find the firm had no appropriate benchmarks and it was therefore, very difficult to tell how the client fared.
We ran a comparative benchmark for them and realized their asset management firm was under-performing by a huge margin. On top of that there was no clarity on what fees the client was paying. Know what you are getting for your money and be sure you have an appropriate benchmark.