What's your number? Part Two

Dr. Jason White
Director of Investments, Family Investment Center

This is a continuation of my last column discussion of the best-selling book "The Number" by Lee Eisenberg. I previously indicated that the book itself was primarily a moral and philosophical examination of the process of monetary accumulation. Eisenberg asks us some difficult questions regarding our motives for saving; our future plans, be they in retirement or otherwise; and the most difficult financial question of all – how big must our “number,” that is our annual income generated in retirement, be.

Page 251 of the Eisenberg primer describes for us what he calls “The Number, Quick and Dirty.” Despite the rule-of-thumb nature of the title of Eisenberg’s number calculation, his formula is actually quite elegant and comprehensive. If you are nearing retirement, or a prudent long-term planner wanting a comfortable retirement, consider plugging your financial information into the following formula.

A) Total all of your investments account balances for retirement.
B) Multiply line A by .04, which represents a safe and reasonable 4 percent rate of savings withdrawal in retirement.
C) Divide your total home equity by the number of years you plan to live in retirement. When I do such financial planning, I automatically assume a client lifespan of 100 years. If you run out of money at age 100, you probably won’t know or care anyway!
D) Divide any anticipated inheritance monies your expect to receive by the same number of years you used in part C.
E) Add the anticipated annual Social Security payment you expect to receive.You get a statement from the Social Security Administration every year showing this amount, so it shouldn’t be too tough to find.
F) Add in your annual anticipated pension or annuity payments (if any).
G) Add in realistic earnings you expect to possibly receive from part-time work, consulting, etc., if any.
H) Total lines B through G. This total represents the annual dollar amount you can reasonably and safely expect to have available to meet expenditures during your retirement years.

See, that wasn’t too horribly complex. So, how did you come out? Were you pleasantly surprised? Were your intellectual gut-feeling “number” guesses close? Are you shocked and terrified that you won’t have enough money in your golden years?
Take a deep breath.

Now you know the facts of your situation and can begin to tweak the savings or expenditure side of your personal balance sheet as you and your financial advisor see fit, especially if it appears you may be short (as most of us probably are). If you have a number of years left to retirement, or can delay retirement a few years longer than you had planned, you may be able to make up the difference with more aggressive savings. Note: I do NOT recommend more aggressive investing for folks nearing retirement for fear of principal loss and a worsening of the situation. Sometimes macroeconomic timing is just lousy. Still, even a prudent investor, with an understanding of portfolio risk, should likely never drop their stock allocation to less than 25 percent of investable assets.

The other side of the coin to examine is your anticipated retirement expenditures. Maybe regular golfing at Mozingo makes more sense for you that at St. Andrews. A reasonably priced Ford is probably nearly as reliable and comfortable as that coveted BMW. You get the idea ...

I hope you found this exercise helpful and informative. Call me if I can be of assistance to you in fulfilling your long-run dreams.