Wednesday, June 11, 2008

"Number Schmumber"
Here's Why I Don't Like Retirement Numbers

My regular readers may recognize that "Number, Schmumber" phrase in today's title, because I've mentioned before that there's a tentative chapter called "Number, Schmumber," in my book-in-process, Platinum Living. My feeling is that one's retirement "number" is a moving target at best, and coming up with one requires a lot of static assumptions at a time when retirement itself is becoming more and more of a dynamic proposition.

To underscore my skepticism, here's a link to a June 9th article from Yahoo Finance entitled, "Is $1 Million Enough to Retire On?" I have recommended several Yahoo Finance articles in the past, but this is not one of them, except as an example of how narrow retirement thinking can get. Yep, this one really set off my "Retirement Hogwash Detector."

For example, the first heading has the scary title, "It's probably not enough," in bold, followed by a quote from the author, Michael Farr, of a book entitled A Million is Not Enough ... (Gee I wonder what his conclusion's going to be?) Although I don't disagree with Farr's recommendations, the little example he uses to make his point completely ignores social security in the equation. That is, since a million will only earn $50,000 a year, if your income needs are more than $50,000 a year, you'll eventually go under... duh!

The second section heading is actually accurate ... For security, try an annuity... It's just bad advice. This author recommends setting aside $200,000 of your million against "emergency medical expenses and buying an inflation protected annuity with the balance. In his example, the remaining $800,000 should be put into an annuity earning $45,000/year, and this, plus your social security (at least he included it) would amount to over $80,000/year and would replace a preretirement income of over $100,000. And actually, if you agree with his premise that the retirement income replacement rate is 80% (more about this later), this analysis is fine.

I have three problems with the annuity argument used here. First, I would never recommend that someone put 80% of their money in ANYTHING. Second, annuities really only make sense for older retirees, when life expectancies get low enough that there really is a premium for leaving your money to the insurance company. This guy is recommending that you do it for a return of 5.625% (45,000/800,000)! Thirdly, I believe that retirement, like the life that leads up to it, should be lived so as to give yourself maximum flexibility to pursue your dreams. And an annuity is one of the LEAST flexible of all investments.

There's a third voice in this article, a voice of reason. His name is Jonathan Pond, and his section is entitled "Stop worrying so much, and get out your golf shoes. Pond wrote a book called You Can Do It! The Boomer's Guide to a Great Retirement. "The financial services industry has made a good living for themselves scaring people," says Pond, a financial planner and author of You Can Do It! The Boomer's Guide to a Great Retirement. "For many people, $100,000 to $200,000 is enough to retire on."

That's certainly good news for many in the Platinum Years readership, and many of my middle income clients. Remember, one of our missions is, "Life planning for the rest of us."

There's another undercurrent of disagreement in the Yahoo Finance article. Just how much income does a person need to replace in retirement? Some say 100% or more, while financial planners like Pond and myself say much less. The financial planning industry in general is quite divided on this point, and yet it is key to the calculation of your retirement number.

I'll be blogging more on various aspects of this topic over the next few days, and I've also moved Pond's book up to the top of my reading list. Meanwhile, "stop worrying so much and go get your golf shoes." :-) Bob

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