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Retirement: Why your 'number' doesn't matter
Old 06-20-2008, 10:54 AM   #1
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Retirement: Why your 'number' doesn't matter

(Money Magazine) -- Back in the '60s, when the musical "Hair" was heralding the dawning of the Age of Aquarius, the popular catchphrase was "What's your sign, man?" But with Hair now a nostalgic memory (in my case literally) and boomers more concerned about retirement than about Jupiter aligning with Mars, the new mantra is "What's your number?"

Indeed, the phrase has become such a part of the national psyche that financial services firm ING has made it the basis for a clever ad campaign showing people going about their everyday business while carting around a bright orange six- or seven-figure sum that represents how much money they need to retire.

As much as I believe that it's good to have goals, I don't think you should get too hung up on any one number. For starters, it can be pretty discouraging to find out that your number is $2 million if you've got a hundred grand in your 401(k).

And with so many variables in retirement planning, it's unrealistic to think that a single number can truly reflect how much you'll need in 10 or 20 years. Even if you could make such a projection accurately, your number can change significantly if you alter a few assumptions, as you can see in the box below. Rather than fixating on one number, I suggest taking this three-step approach.

Think income, not a lump sum

What you really want to know isn't how large your nest egg should be - it's hard to translate a big number into a lifestyle. It's the odds that all your resources will be able to generate a reliable income.

For this you'll need to use an online calculator - or hire an adviser. I like the my Plan Retirement Quick Check calculator in the Retirement and Guidance section of Fidelity's website (fidelity.com; registration is required). Plug in such information as your current savings, how your money is invested, Social Security payments and any pensions, and you'll get an estimate of your chances of producing different levels of retirement income depending on how well the markets do. The nice thing about this approach is that it tells you where you stand with a number you can relate to.

Build in a safety margin

No matter how rigorous an analysis you do, you may still end up needing more cash in retirement. One likely reason is higher-than-anticipated health-care costs. A March study by Barclays Global Investors contends that with Medicare's long-term expenses outpacing its revenue to the tune of $70 trillion, the program simply isn't sustainable. As a result, Barclays estimates that future middle- and upper-income retirees could face medical and insurance costs that would effectively reduce their income by as much as 20%.

Who knows, maybe Congress will come up with a less painful way to solve this problem. But just in case, you should consider saving more to build a cushion to help absorb retirement shocks.

Give yourself regular checkups

The road to retirement can have many detours: a layoff, a market downturn. So every year, check in to see whether you're still on track and, if not, fine-tune your plan by saving more or tweaking your investment strategy. By making adjustments early, you'll have a better shot at retiring in the style you envision.

Next time someone asks you what your number is, tell them you don't know and don't particularly care - but that you are improving your chances of retiring comfortably, whatever the price tag may be.
Your big number? It's a moving target

Consider how much your number, the total sum you need to retire, varies as your plans change - you work longer, say, or need more of your pre-retirement income than expected.
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Old 06-20-2008, 10:55 AM   #2
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I like this, for the most part. I don't consider myself FI when I hit a certain "magic number," but rather a number of dynamics that change over time. What I think I would need today may be lower or higher (in real terms) than what I'll think I need in five years.
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Old 06-20-2008, 11:08 AM   #3
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On the other hand, it's nice to have goals, and intermediate goals too. However there is no goal that I have which is not adjusted a couple of times a year, as needed.
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Old 06-20-2008, 12:10 PM   #4
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When I first got out of college in 1973, I figured out that if I could ever get $250,000 I could retire and live on just the income from stock dividends. At the time it was pretty common to have large caps paying 5 to 8% dividends.

My salary at the time was $11,700. Even if I only got 5% on average, I'd gross $12,500. Since I didn't know how to spend even $11,700, I'd steadily grow richer and richer and might even be worth $500,000 someday.

Remembering this is the cause of one of my basic fears. You never know when the cumulative effect of inflation will turn your best laid plans to waste.

I still think in terms of "my number" but it translates into an income stream with some inflation protection built in. It also includes a "Plan B" for reducing expenses if the situation goes to crap.
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Old 06-20-2008, 05:49 PM   #5
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Quote:
Originally Posted by Boxkicker View Post
Think income, not a lump sum

What you really want to know isn't how large your nest egg should be - it's hard to translate a big number into a lifestyle. It's the odds that all your resources will be able to generate a reliable income.

For this you'll need to use an online calculator - or hire an adviser. I like the my Plan Retirement Quick Check calculator in the Retirement and Guidance section of Fidelity's website (fidelity.com; registration is required). Plug in such information as your current savings, how your money is invested, Social Security payments and any pensions, and you'll get an estimate of your chances of producing different levels of retirement income depending on how well the markets do. The nice thing about this approach is that it tells you where you stand with a number you can relate to.
I never do understand people who resist "the number." I take it this was from a Money magazine article, but the first recommendation (above) is nothing but a calculation derived from a future "the number."

IMHO it makes perfect sense to develop your "number" to give yourself spending, saving, investing goals. I sure wouldn't want to wait until I'm 65 to evaluate my financial outlook. In fact, it's probably even more important as pensions have declined and most of us must rely on our personal holdings far more than the past few generations. While it's true that the future is probably more uncertain than ever in recent history, that only means:

a) we need to be very conservative with the inputs to our "number" (higher taxes, lower returns, lower SS benefits, higher healthcare costs, higher inflation, etc.) and
b) more than ever, we need to be prepared to adjust course through retirement (go back to work, spend less, and/or change investments).

Rejecting "the number" altogether makes no sense to me, sort of a form of denial...
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Old 06-20-2008, 06:22 PM   #6
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ditto.
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Old 06-20-2008, 06:47 PM   #7
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I concur with ditto and d.

Having a "number" was a goal toward which I focused my attention for many years - although actually hitting it was anticlimatic.
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Old 06-20-2008, 07:32 PM   #8
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and i concur with playaman!
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Old 06-20-2008, 07:42 PM   #9
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Quote:
it's unrealistic to think that a single number can truly reflect how much you'll need in 10 or 20 years.
True, just adjust this number as circumstance changes.
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Old 06-20-2008, 08:43 PM   #10
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I have a spreadsheet that tells me my "number" but my "number" is the day I am projected to acquire a FIRE stash which is equal to 50 times my last six month's spending. My projection is home brewed based on my income, savings, inflation rate, rate of return, etc. As I update my balance sheet and expenses (frequently) and adjust my assumptions (rarely), my spreadsheet dashboard shows me my up to date number. At the moment my number is 46.49 (which translates to a FIRE date of 11/20/2015).

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Old 06-20-2008, 09:03 PM   #11
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I have my number. I can't see doing this without a goal. But when the time comes that I reach that number, even though it's conservative in some ways, the only way I can see actually pulling the plug on my corporate job is with a Plan B. In my case that will be part-time work. Given the variables in our future: inflation, taxes, health care, food/energy, social security, Medicare, etc. I'm going to need another modest source of income to sleep well.
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Old 06-20-2008, 09:55 PM   #12
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I also have a spreadsheet which tells me when I will hit my magical number, which is 15-20 years from now. However, in building that spreadsheet, it was very clear to me that so many factors could have a noticeable effect on my retirement date. So, my long-term number is just a rule of thumb.

The biggest thing that throws off my calculations is my % of gross saved and the second biggest is my investment returns % on each given year. These two numbers number are pretty much guaranteed to change over time and as such are impossible to assign a static values.

So, I just stick to my golden rule, save as much as I reasonably can. For the moment, as a single person with no dependents, little time to spend on hobbies, and a good income, that rate is about 65-70%. It is certainly foreseeable that it may drop to only 15-20% or even less depending on the situation at that time (I certainly hope it would be for a good reason though if it did).

Without some kind of concrete goal to reach for though, it is much harder to save for the future.
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Old 06-21-2008, 06:27 AM   #13
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So, my long-term number is just a rule of thumb.
For all the reasons you stated, that's all anyone's "number" is. But without a "number" goal, you can't approach FI. No one can predict how all the variables will play out...
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Old 06-21-2008, 07:15 AM   #14
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When I first got out of college in 1973, I figured out that if I could ever get $250,000 I could retire and live on just the income from stock dividends. ... My salary at the time was $11,700. Even if I only got 5% on average, I'd gross $12,500. ... Remembering this is the cause of one of my basic fears. You never know when the cumulative effect of inflation will turn your best laid plans to waste. ...
Inflation adjusted, that 1973 salary would be $57,391 in 2007 dollars. So, at 5% return your number is $1,147,820.
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Old 06-21-2008, 08:40 AM   #15
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Inflation adjusted, that 1973 salary would be $57,391 in 2007 dollars. So, at 5% return your number is $1,147,820.
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Thanks for the update. Unfortunately, an average of about 2% is all you can hope to get now in S&P dividends. That would make me need about $3 million now.

I expected inflation to be taken care of by dividend increases and stock appreciation. I wonder how I would have done with my 100% dividend paying stock portfolio if I really had the $250,000 in 1973. I probably didn't have that amount until the mid-80's when I lost my first job due to lay off. By then inflation and the prior energy crisis had more than quadrupled my salary.
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Old 06-21-2008, 11:18 PM   #16
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I had a number for many years, but I now realise it was the wrong kind. Over new year I refined my investment strategy, and now the number I monitor is not capital but the income it produces. My spreadsheet translates capital (however deployed in shares, bonds, REITs, cash) into a sustainable income I can take without depleting capital. (How to do this for shares is worthy of a separate thread, so i won't go into it here.) There is almost no market event that can cause this income number to fluctuate. If shares fall/rise 20%, what changes is the amount of capital producing my income, but the income remains unaltered. The unimportant number (net worth) can fluctuate hugely, but the important one (income I can safely spend) should stay more or less the same in real terms day-in and day-out for decades on end. (Says the guy who's had this strategy for nearly six whole months now.)

Why monitor a number that doesn't change? Well actually it is pretty boring, though the fact that I do still work 3 days a week and my wife works full time and contributes to finances means the number is still slowly growing. The main purpose of my spreadsheet is to tell me what asset class to be invested in. I suspect this is going to be controversial but: I am happy to be 100% in REITs or 100% in shares, and to switch from one to the other overnight when my predicted yields cross. In practise I suspect a switch will be necessary at most once every decade or so. (The strategy could also switch me into cash or bonds if I believed they offered a higher long-term return than REITs or shares at their current prices, however I don't expect that to be true very often. I have retrospectively calculated that my expected return on shares would have been 2% at the height of the year 2000 boom, so I know I would have been out of shares then, as even cash would have been a better option at that time.)

From memory (I'm on holiday away from my computer at the moment) I am expecting shares (actually SP500 which I use as a proxy, even though I'm a British investor) to yield 5.9% real and my British "REITs" to yield 6.9%, slightly less than their weighted dividend yield of something like 7.9%. Consequently I'm 100% in REITS. (Since the middle of last year commercial property funds have exhibited their biggest and most dramatic crash in history. More through good luck than judgement I seemed to have bought near the bottom of the lows since then, though of course prices may still fall further.)

Currently my number, income I can safely take, is about a third higher than I need to pay my forseeable living expenses, however it's becoming increasingly clear to me that unpredictable costs could easily outweigh the ones I plan for. (A loose tile in the bathroom last year has somehow translated into 10,000 USD of refurbishment that wasn't in my plan. I know two people who've faced the choice of spending of the order of $50,000 on dental or living without teeth for a few decades, so I reckon I need to have money set aside for that and similar events. And then of course I might still have children in future...) Anyway, the point of this paragraph was meant to be that I do allow for some margin of error when predicting income returns on my investments. Even if I weren't still earning, I would be (but for the bathroom) spending considerably less than the predicted income.
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Old 06-22-2008, 09:05 AM   #17
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Currently my number, income I can safely take, is about a third higher than I need to pay my forseeable living expenses, however it's becoming increasingly clear to me that unpredictable costs could easily outweigh the ones I plan for. (A loose tile in the bathroom last year has somehow translated into 10,000 USD of refurbishment that wasn't in my plan. I know two people who've faced the choice of spending of the order of $50,000 on dental or living without teeth for a few decades, so I reckon I need to have money set aside for that and similar events. And then of course I might still have children in future...) Anyway, the point of this paragraph was meant to be that I do allow for some margin of error when predicting income returns on my investments. Even if I weren't still earning, I would be (but for the bathroom) spending considerably less than the predicted income.
$50,000 on dental? Whew - - now there's something I hadn't considered possible. I thought I had it tough just paying for a few root canals now and then, but I have never spent even 10% of that amount on dental during a year.

You never know what life will bring. Like you, I plan for and expect the unexpected.
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Old 06-22-2008, 09:18 AM   #18
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I had a number for many years, but I now realise it was the wrong kind. Over new year I refined my investment strategy, and now the number I monitor is not capital but the income it produces. My spreadsheet translates capital (however deployed in shares, bonds, REITs, cash) into a sustainable income I can take without depleting capital. (How to do this for shares is worthy of a separate thread, so i won't go into it here.) There is almost no market event that can cause this income number to fluctuate. If shares fall/rise 20%, what changes is the amount of capital producing my income, but the income remains unaltered. The unimportant number (net worth) can fluctuate hugely, but the important one (income I can safely spend) should stay more or less the same in real terms day-in and day-out for decades on end. (Says the guy who's had this strategy for nearly six whole months now.)
Well I hope you start that thread, because I suspect there would be a lot of interest, I know I'd be interested...
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Old 06-22-2008, 09:44 AM   #19
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Well I hope you start that thread, because I suspect there would be a lot of interest, I know I'd be interested...
This sounds like the "Norwegian Widow" approach. Buy good dividend paying stocks and cash the checks as they arrive. The SWR using this method is under 4% if you're counting on inflation protection.
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Old 06-22-2008, 11:32 PM   #20
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$50,000 on dental? Whew - - now there's something I hadn't considered possible. I thought I had it tough just paying for a few root canals now and then, but I have never spent even 10% of that amount on dental during a year.

You never know what life will bring. Like you, I plan for and expect the unexpected.
Case number one was a colleague, age 32, who while skiing off-piste lost his footing going over a rock that was concealed by a thin layer of snow. He eventually contrived to use his lower jaw and another protruding rock in combination as a sort of brake. Despite having at least four different insurances that might have been expected to reinstate his teeth, it turns out that nothing covers the cost of dental implants. (The various insurances did cover the cost of helicoptering him off the mountain, emergency hospital treatment in France, and further repairs to his broken jaw in the UK. However all the various insurers including the state felt that wearing dentures to replace several swallowed teeth was an acceptable alternative to implants.)

Case number two was a relative who had a tooth whose root started growing upwards into the jaw, eventually forming a large (luckily non-malignant) tumour. In the process of removing the tumour he had to have all his upper teeth removed. He had the best employer-provided health insurance around, but again dental implants were not covered.
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