Calculate your number: what do you need for retirement?

By Jason T. White, ph.D.
Associate Professor of economics, Northwest Missouri State University
Director of Investments, Family Investment Center

I was watching financial TV one evening and a popular commercial jogged my memory. The ad shows various folks like you and I walking around with our “numbers” tucked under one arm. These television commercials are patterned after a book called “The Number: What do you need for the rest of your life and what will it cost?,” by Lee Eisenberg, one of the top nonfiction books on The New York Times best seller from a 2006. It is a must read for anyone approaching or beyond their 50th birthday, and a strongly recommended read for those of us a few years younger.

Eisenberg does a great job in mixing practical investment principles and theory in a comprehensive way, but without losing sight of the purpose of identifying one’s number. What is your number, you might ask? Well, according to Eisenberg, it is the dollar amount of your retirement nest egg which will allow to accomplish all of those yet unfulfilled hopes and dreams in life.

To me, this is what made “The Number” so interesting. I have read dozens of how-to financial planning books related to asset accumulation, goal-setting, life expectancy, estate planning, and so forth. “The Number” is the first book I have run across that looks at the more spiritual or humanitarian side of wealth accumulation and planning, for lack of a better phrase.

Eisenberg prods the reader to answer the question why we seem to be working our tails off trying to build the biggest number we possibly can. Is it the simple accumulation of money that is our primary goal and purpose in life, or is it what we can do with that accumulated sum that will make us happy?

These are not easy questions to ponder nor readily answer.

As a member of the business professoriate and a professional director of investments, I naturally am inclined to teach students in the classroom, and motivate clients in the business world, to save and invest as much as they can afford to do, with the idea of helping secure a comfortable retirement or other such long term financial goals.

After reading “The Number,” I believe I need to broaden my focus a bit further.
Everyone has his/her own picture about what the ideal retirement for them looks like. For some it is travel; others golf; and some simply want to be able to visit the grandkids a little more often. It is these sorts of thought-provoking questions that Eisenberg asks us to consider – and for most, the answers will not come effortlessly.

We have all heard stories from time-to-time about the death of an elderly middle-class individual who we come to find out actually had socked away a seven or even eight-figure number – the classic millionaire next door. Invariably, the next generation inheriting this chunk of change will blow it on trips, cars, homes, etc. consuming away a lifetime’s worth of disciplined savings and investment of the decedent.

“The Number” asks us to consider if that scenario reflects our personal financial wants and desires. Eisenberg suggests we work backwards when calculating our own number. In other words, begin by estimating the amount of annual income we will need in retirement, adjusted for inflation of course, and then compute the nest egg size (the number) required to provide that amount of income, using a conservative rule-of-thumb 4% savings withdrawal rate. Other sources of income besides just savings need also be factored in, like Social Security and pensions for example.

In my next column, I will dig a little deeper into the nuts and bolts of how to calculate your own number, but until then, let’s spend some time focusing and contemplating on what we want to do with our number, not just how to maximize the size of it.