Financing Retirement II: What's Your Number?
This is the second article in a series on financing retirement that I'm planning to put together. My first post, "Thoughts on Financing Retirement, can be found just below this one. The idea of the series is to provide one person’s view of retirement from the front lines.
You have probably seen one of the cute ING commercials where everybody is carrying their “number” around. One person will be carrying $1,305,622. Someone else will be carrying $2,201,588.” One poor guy’s number is “$Gazillion.” It turns out that he really didn’t have a plan.
“The Number” has become the holy grail in retirement planning. ING says that “Every person has one,” and defines it as “The amount you will need to have saved to retire the way you want.” On their home page, they show an example that changes each time the page is accessed. When I went there, the number was $1,280,385. It was festooned with little notes like, “Sally found her number,” “Now that I’ve found my number, I’m one step closer to retirement,” and “Bringing my lunch to work will save me $222,158 over 40 years.”
The implication is obvious. If you haven’t saved “your number” by the time you retire, you’re screwed. You can’t have the retirement you want. Or you just can’t retire. ING provides a little calculator for you to find YOUR number. Just fill in your age, current income, how long you want the money to last, etc., and your number pops up (cleverly in the same font and orange color as in the commercials). I did it, and discovered two things:
I don’t know how their calculator works, but I’ll bet they are making some of the assumptions that I criticized in my first article. Assumptions that lead to a distorted view of how retirement really works.
In that first article, I said, “It’s all about income.” Meaning that, in retirement, you need to generate the income needed to cover your expenses. And that, I think, is the disconnect: Calculators and general rules of thumb focus on the sum total they think you’ll need to generate the income you require. But there are so many ways to generate income that they overlook some, and in many cases they also make the mistake of over-estimating how much you will need. So they might say you need $2,380,507, when in fact you only need half that much.
In short, they’re focusing on the wrong number. They’re focusing on an amount of capital to fund “the retirement you want.” But they should be focusing on the annual income needed to live the retirement you want. So the characters in the ads should be carrying around numbers like $80,000, or $120,000. Not numbers in the millions or a gazillion.
In the first article in this series, I made reference to an article, “Why I Love Dividends, that appeared on another financial site, and to the comments it generated. One thread of the comments revolved around the capital versus income distinction. What I will call the pro-dividend crowd argued that dividends themselves can fund or help fund retirement. The pro-capital-retention crowd argued that one should aim to let his/her capital grow as much as possible, then sell some assets each year to fund retirement.
In the context of the current question—are you looking at the right number?—I think that this debate mirrors the disconnect between the ING ads and my point that it all comes down to income. The ING approach must assume that capital will be converted to income by selling off some assets each year. After all, your grocer will not accept a framed “$2,380,507” in payment for your tomatoes. He/she wants money, not a printout of your assets.
In my earlier article, I suggested that each person should create a retirement budget, showing the annual income needed to “retire as they want.” Then list the sources of income—a part-time job, pension, social security, dividends, interest, and the like. Only when a gap needs to be bridged—when the various sources of income don’t meet your retirement budget—do you need to sell off part of your assets. And—gasp—if you have been purchasing dividend growth stocks for many years, it is entirely possible that the yield of those stocks may have reached doouble-digits based on what you originally paid, and that they alone may be generating so much income that there is no gap that needs to be bridged.
I am no fan of annuities, but an annuity is a vehicle that converts capital to an income stream. Using the simple calculator at Immediate Annuities, one can see that you could generate $2000 per month by making a one-time payment of $326,428 (for a 64-year-old male in New York) to an insurance company. The fine print: This buys a “Single Life Income with No Payments to Beneficiaries….You receive this income for your lifetime, which means, you can never outlive this income. After you die there are no payments made to beneficiaries.”
Let’s say you have a pension that pays you $2000 per month. Many boomers have pensions from private companies. So do cops, firemen, teachers, and other former public employees. Using the same calculation, you can see that the pension is the equivalent of having $326,428 more capital than you actually have. Social Security is another income stream with a capital equivalent. It is by figuring things like this into your retirement planning that the gap is bridged between ING’s huge, scary number needed for retirement and the more commonsense annual retirement budget that actually funds “the retirement you want.”
You have probably seen one of the cute ING commercials where everybody is carrying their “number” around. One person will be carrying $1,305,622. Someone else will be carrying $2,201,588.” One poor guy’s number is “$Gazillion.” It turns out that he really didn’t have a plan.
“The Number” has become the holy grail in retirement planning. ING says that “Every person has one,” and defines it as “The amount you will need to have saved to retire the way you want.” On their home page, they show an example that changes each time the page is accessed. When I went there, the number was $1,280,385. It was festooned with little notes like, “Sally found her number,” “Now that I’ve found my number, I’m one step closer to retirement,” and “Bringing my lunch to work will save me $222,158 over 40 years.”
The implication is obvious. If you haven’t saved “your number” by the time you retire, you’re screwed. You can’t have the retirement you want. Or you just can’t retire. ING provides a little calculator for you to find YOUR number. Just fill in your age, current income, how long you want the money to last, etc., and your number pops up (cleverly in the same font and orange color as in the commercials). I did it, and discovered two things:
- I need more than twice as much as I’ve got; and
- I can’t retire unless I accumulate well over $1,000,000 in one year.
I don’t know how their calculator works, but I’ll bet they are making some of the assumptions that I criticized in my first article. Assumptions that lead to a distorted view of how retirement really works.
In that first article, I said, “It’s all about income.” Meaning that, in retirement, you need to generate the income needed to cover your expenses. And that, I think, is the disconnect: Calculators and general rules of thumb focus on the sum total they think you’ll need to generate the income you require. But there are so many ways to generate income that they overlook some, and in many cases they also make the mistake of over-estimating how much you will need. So they might say you need $2,380,507, when in fact you only need half that much.
In short, they’re focusing on the wrong number. They’re focusing on an amount of capital to fund “the retirement you want.” But they should be focusing on the annual income needed to live the retirement you want. So the characters in the ads should be carrying around numbers like $80,000, or $120,000. Not numbers in the millions or a gazillion.
In the first article in this series, I made reference to an article, “Why I Love Dividends, that appeared on another financial site, and to the comments it generated. One thread of the comments revolved around the capital versus income distinction. What I will call the pro-dividend crowd argued that dividends themselves can fund or help fund retirement. The pro-capital-retention crowd argued that one should aim to let his/her capital grow as much as possible, then sell some assets each year to fund retirement.
In the context of the current question—are you looking at the right number?—I think that this debate mirrors the disconnect between the ING ads and my point that it all comes down to income. The ING approach must assume that capital will be converted to income by selling off some assets each year. After all, your grocer will not accept a framed “$2,380,507” in payment for your tomatoes. He/she wants money, not a printout of your assets.
In my earlier article, I suggested that each person should create a retirement budget, showing the annual income needed to “retire as they want.” Then list the sources of income—a part-time job, pension, social security, dividends, interest, and the like. Only when a gap needs to be bridged—when the various sources of income don’t meet your retirement budget—do you need to sell off part of your assets. And—gasp—if you have been purchasing dividend growth stocks for many years, it is entirely possible that the yield of those stocks may have reached doouble-digits based on what you originally paid, and that they alone may be generating so much income that there is no gap that needs to be bridged.
I am no fan of annuities, but an annuity is a vehicle that converts capital to an income stream. Using the simple calculator at Immediate Annuities, one can see that you could generate $2000 per month by making a one-time payment of $326,428 (for a 64-year-old male in New York) to an insurance company. The fine print: This buys a “Single Life Income with No Payments to Beneficiaries….You receive this income for your lifetime, which means, you can never outlive this income. After you die there are no payments made to beneficiaries.”
Let’s say you have a pension that pays you $2000 per month. Many boomers have pensions from private companies. So do cops, firemen, teachers, and other former public employees. Using the same calculation, you can see that the pension is the equivalent of having $326,428 more capital than you actually have. Social Security is another income stream with a capital equivalent. It is by figuring things like this into your retirement planning that the gap is bridged between ING’s huge, scary number needed for retirement and the more commonsense annual retirement budget that actually funds “the retirement you want.”
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