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« Ask Yourself One Question: "Do I Feel Lucky?" Well, Do Ya Punk? | Main | The Number and How Debt Affects It »
Monday
Dec032007

Numer, Number, Wherefore Art Thou or When is Enough Enough

The question really is "What is Enough?" isn't it?  That which wakes us up at night is the fear that we may not have enough when we pull off that headset for the last time, make that last landing, or figuratively, like Elvis, leave the building for the last time.  How much do we need to secure the rest of our lives; in other words, what is that number?

Some folks in the financial services industry say that you can take your last work year's income and multiply it by 70% to give you a rough estimate of your spending needs in your first year of retirement.  Others say to use 80%; others say no, better use 100% just to be safe.  Others say that in some cases recent retirees have even seen their spending increase!  What's an aspiring retiree to do?  In his fine book, The Number, Lee Eisenberg suggests that the safest approach is to keep every receipt for every purchase that you and your significant other make for a month, toss them in a shoebox, and then take the shoebox to your trusty old CFP (Certified Financial Planner).  Let him/her crunch the numbers to give you an idea if you are in the ballpark with your number.  This sounds like good advice.

Of course, that CFP will likely tell you that you need to develop a spending plan for your retirement months.  Some people will call this a budget, but I have always had an aversion to that term for some reason; it just sounds so limiting, so controlling.  I'm calling it a spending plan.  So as I started thinking about my retirement spending plan, I came across a spending plan for an "average US couple" making $70,000 per year that came from the Statistical Abstract of the United States.  According to this abstract this average couple spent only $20,000 for basic costs of living, and they spent only another $7,000 on discretionary costs, the "pleasures of life."  I read this, and I had a couple of thoughts.  1) This imaginary couple doesn't know crap about spending money and/or they simply were not trying very hard and, 2) it was obviously a government agency, peopled with little accountants wearing green eyeshades, that arrived at these figures.  They may very well have other fantasy pursuits like working on the federal budget.  I also thought, "Get Real!"  Still, you've got to wonder, where do these imaginary people live?  Maybe they lived in the last century when a gallon of regular was only $1.50.

So I decided to try my hand at my own spending plan for retirement.  I divided my plan into two columns, labeled fixed and variable expenses.  Fixed expenses are items that must be paid if one wants to continue living in their homes with electricity, water, cable, etc.  These are non-discretionary items; things that the household must have.  I realize that everyone may not consider cable non-discretionary.  Those that feel that way obviously graduated from some second tier college, Harvard perhaps, whose football team is not on television five or six times every fall.  Under my fixed expense column I included: groceries, property taxes, automobile expenses ( including insurance, maintenance, and gas, about which only OPEC knows), health insurance, home utilities, phone, household maintenance and supplies, cable/internet, sewer and water, golf club dues, and pet care (gotta take care of my boy, Presley.)  Of course, a mortgage will obviously fall under this column as well.  Under my other column, variable, I placed these items: vacations, entertainment/recreation, clothing/dry cleaning, contributions/charitable, gifts, household furnishings, magazine/paper subscriptions, meals eaten out, education/books, and a big old miscellaneous item just in case.  I know, some of you are probably noting that golf club dues should be under variable, discretionary spending.  To you I simply say mind your own business!  You obviously just don't understand.  Please note that variable items may be no less important to a household that the fixed expenses, but usually the household has some control over how much thy spend on these items.

So I carefully tallied all these items for my retirement plans, and was startled when I came up with a monthly figure of around $47,500 which was especially shocking since it is about $42,000 more than my current spending.  Guess my retirement is not going to be all I had fantasized!  I then got busy cutting here, whacking there, comprising here and there, and arrived at some alternate plans.  I now plan to stay with my cousin David when visiting the San Francisco area rather than staying at the Pebble Beach Lodge.  Unless David has raised his prices considerably this should save me a bundle.  The new retirement Porsche looks like a goner!  May have to give up the idea of a beach house on Hilton Head.  Looks like a month in Italy each year is probably not going to happen either.  All their statues are embarrassingly nude anyway, and then there's that whole euro thing.  So after a few adjustments, my spending plan now looks a little more doable.  I subtracted from my monthly expenses my pitifully small pension that the PBGC is promising me since my employer jettisoned their promise during bankruptcy, and I arrived at a number that I will have to generate myself until that Social Security check starts arriving.  I am not sure at what age I will begin receiving that check as that is a whole new topic to discuss, but I know I will not have it if I retire at 60.  So I now have a monthly number to cover unless or until I again revisit my spending plan or decide to once again seek employment.

So how do I turn that monthly spending number into THE number, that nest egg needed to generate my monthly?  Of course I multiply it by 12 to give a yearly number.  Then I divide that yearly number by 4% since numerous studies have indicated that one should be able to draw 4% per year from their retirement fund without outliving their money.  This 4% figure is almost universally accepted in the financial planning field as being a valid planning factor.  Now suppose that you find that you are going to need $2500 per month from your savings to supplement your other retirement income.  Your computations will look thusly:  $2500 x 12 = $30,000 / .04 = $750,000.  Viola!  Your number is $750,000.  This 4% theory is based on your retirement fund being invested 50/50 in equities and bonds/cash.  With the proper asset allocation and the proper rebalancing at regular intervals, and IF (great big IF) the markets act in any way like they have historically, your number may support a higher yearly draw, say 4.5% to 5%.  Prudence dictates however, that you begin your retirement planning with a 4% draw in mind.

Of course we have not spent any time at all considering what we want to accomplish with our newly found free time, have we?  Until one considers that, one cannot very well determine what his spending plan will look like.  This process involves asking one's self questions such as "What is really important to me for the rest of my life?"  "What have I always wanted to pursue, but have never before had the time?"  What can I now do that would accomplish the most good for myself and others?"  Some recent retirees have gone back to school to prepare themselves for entirely new careers.  They are pursuing every conceivable study from the seminary to ornithology.  You may decide to do something like that.  One good book that discusses such topics is What Color Is Your Parachute? For Retirement, Planning Now for the Life You Want, by Richard N. Bolles and John E. Nelson.  The authors present a number or worksheets and exercises that can help you decide what is really important to you during your "second life."

I will discuss the number more in future topics. 

Fly safe!

P. S I have included some links in my article, Do You Monte Carlo?, that follows that will take you to some really neat retirement calculators that will help you as you contemplate your number.  Check them out.

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