We Got Your Number Right Here, Baby.
Remember when you were a kid and you thought being a millionaire meant you were rich? Oh, how things have changed- $1,000,000 isn’t what it used to be, and you may be shocked at retirement if you don’t understand the concept of “The Number”, and why a million dollars is no longer what you thought it was when you were a kid.
First, let’s talk about the crisis we’re already in. According to Investopedia, a survey done in 2016 by Go Banking Rates indicated that only 26% of Baby Boomers are on track to replace their working year’s income, and 24% have no savings at all. None. The scary thing is, this research is done by survey- it’s not like a team of planners went in and analyzed these Baby Boomer’s assets to income ratio. We read this, and we think, “How many of those responders really know?”
And that’s where The Number comes in. The Number is simply the amount of investable assets you must have to create the income you need to live from year to year. And the reality is, coming up with this number is difficult for financial planners to do, so it’s even harder for the average “anything but a financial planner” to do.
Here’s why The Number is hard to come up with- we have no crystal ball. We do not know how long you are going to live. We do not know what personal crises you may have, including the need for long term care and late stage, uncovered medical expenses. We do not know what rates of return will be, nor do we know tax rates or inflation rates. We do not know if you will be married or get divorced. And with people living 30 years or more in retirement, we don’t even know what the future will look like. 30 years ago, could you have imagined being so dependent on a computer or a cell phone? No. 30 years ago, you may not have had either in your home. The speed of technological development could create a world we can’t even fathom.
But just because we can’t fathom the future doesn’t mean we can’t plan for it. The key is flexibility and margin of error.
Let’s talk about how you should be considering The Number. The Number is not your net worth. Your net worth may contain personal items that are used more for consumption than as true investable assets. These items may be cars, horses, boats, and other personal property no one probably assigns much value to other than you. They are things that tend to depreciate instead of appreciating, and you pay more to maintain them than you will ever get back from them. Most people get this. The Number may not include other residences or property. We get some push back here, but unless you are going to sell these assets for a profit, or they are kicking off income that is net of all of the expenses, then these are personal assets. At best, they are usually low return assets. Your primary residence is even worse. Yes, you can sell it someday or do a reverse mortgage- but would you unless it was an absolute emergency? When you down size, if you are typical, you will want less square footage, but that square footage may cost way more per square foot than what you have now. After subtracting these assets, you’ll also want to take out any cash reserves, life insurance cash values that can’t be tapped to keep necessary policies in place, and other defensive financial tools that you may need to protect yourself. Whatever you have left is The Number that you have to work with right now.
Let’s say it’s $1,000,000. FYI, most people have nowhere close to this. For that reason, you are still as right as you were when you were a kid- it’s still a lot of money. Where you are wrong, is that the lavish lifestyle in which you thought as a child that $1,000,000 could support is no longer the case. Let’s say you have $1,000,000 but you need $120,000 a year to maintain your lifestyle. You still need to inflate that (we’d use 4% a year), and you live for 30 years- you will spend over $5,800,000 to get there. That would be one heck of a return on $1,000,000 to do it- you’d be looking at needing a return north of 20% each and every year.
For more information on this important concept, we recommend reading, “The Number: A Completely Different Way to Think About the Rest of Your Life”, by Lee Eisenberg. It is one of our favorite financial planning books and a great read.
Here’s the conclusion- most people have significantly under saved and under invested for retirement. That is the bad, evil, scary news. The good news is, the sooner you can absorb this information and create realistic standards for yourself the more you will be able to adapt to your circumstances by adjusting your expectations, your lifestyle and your defensive tools. The longer you wait to face your own reality, the more your reality will dictate the circumstances of your life. Income is not wealth, income is the opportunity to build wealth. Don’t waste the opportunity while you have it.
Only 50% of senior citizens have income outside of Social Security today, compared to 54% in 1962. (Investopedia)
The Definition of a Dog
By Kelly Hokanson, CFP®
The term “Dog” is thrown around a lot when it comes to investments. “That investment was a dog,” or “that fund is a dog.” It implies that the investment has underperformed and therefore is not worth keeping. Now, most of the time, we live by the old adage that you shouldn’t stick to a mistake just because you took a long time making it, but sometimes an investment needs time to do what it is supposed to do.
Let’s say you have an individual stock representing one company that has a future, for whatever reason, that doesn’t look promising. Is that a dog? Well, it’s highly possible. Let’s say instead, you have a well-diversified fund that primarily invested in a multitude of high-quality stocks or bonds. Let’s say it’s low cost, but the sector has just been down for a while. Is that a dog? Well, maybe not.
If this fund is hanging in there with its benchmark and has a good solid history of doing so, the sector itself may just be not economically favored right now. Should you get out? Only if you know when to get back in! Trying to time sectors correctly is, in our opinion, as impossible as timing the market.
We have a great tool in our office that we use to help clients understand this point- it’s called the Callan Table, and you can Google it. It takes the major indexes and stacks them from the top performer to the bottom performer each year for twenty years. When you look at it and consider what was happening history, there are lots of surprises in there if you were deciding on where to invest going forward.
We believe a low-cost, well diversified portfolio is the best way to go with your investable assets. Understanding the difference between a dog and what is the price to be paid for diversification is important to good design.
“Climbing out of poverty by your own efforts, that is something on which to pride yourself, but poverty itself is romanticized only by fools.” — J. K. Rowling
Market Update: Volatility Anyone?
3-31-18 YTD Dow: -2.0%
3-31-18 YTD S&P 500: -2.5%
3-31-18 YTD World EX US All Cap: -1.9%
3-31-18 YTD US Agg Bond: -1.5%
Alright, we’ve been spoiled. On March 6, 2009, the S&P closed a bit over 625. The S&P closed on March 29, 2018, at 2640. We’ll take it- happily. Now, who knows what the next ten years hold, but here’s what we’d tell you. We may or may not be in for more volatility in the upcoming years. We’d be surprised if we don’t have it. But we’re always surprised in this job, and we’re always not surprised. The key is to prepare instead of to predict. Take the bad with the good and remember that if you need to talk about what is happening with your situation, you should give us a call, not worry.