If You Want a Big of Egg, You Better Have a Big Hen
“I’m rich- I’m a millionaire!!!!” Many kids dream of being able to say those exact words someday. And not that long ago, a million dollars would have produced enough income to keep someone living a marvelous lifestyle for a long time. But thanks to inflation, a million doesn’t go as far as it used to. Let’s say you make $200,000 a year- nicely done! You have a net worth of $1,000,000. Ok, your house is $250,000 of it- but it’s paid off. Now you have $750,000 of investable assets. How many years, if you have it moderately invested will you be able to replace your income? Our guess is, not as long as you will live in retirement…Things have changed over the last century, but people’s perceptions of how to build that nest egg and how big it has to be have not.
But let’s start by cracking some eggs, so we can show you how things have changed. In the golden olden days, the eggs weren’t all gold, that’s for sure. In fact, when Social Security was passed into law, it was meant to pay out at life expectancy- age 65. Now, people live much longer- with the average being in the middle 80s. Yet Social Security still pays out at a normal retirement age well below the current life expectancy of 84. The good news is, we’re going to live longer than previous generations. But the hard truth is, we’re going to need a bigger nest egg, as Social Security alone will not be able to replace most people’s income needs.
In the 50s, companies wanting to lure workers after World War II offered generous pensions. While some boomers still have pensions, they are no longer the norm, and many are at risk. The guarantees aren’t what they used to be.
Boomers, Generation X, and Millennials have something in common- they will all be more on their own than the previous generation. On the upside, they have more flexibility and if they are disciplined and healthy, will have a chance to do more in their statistically longer lives.
What factors should go into the building of your nest egg? Here are a few things to think about if you are starting from scratch, or making adjustments to a rather large egg.
- Consider the size of your income need. If your budget, including the things you want in life, not just the must haves, is wrong, you could easily run out. A differential of as little as 5 to 10% can make a huge impact over enough years. Make sure you count emergencies and health care costs in that budget as well.
- Consider the length of time you will need your egg to produce. The more you dig into it, the smaller it will get, and then the less income it will shell out. Don’t assume your expenses will go down in retirement- they frequently do not.
- Consider how much volatility you can stand. Do you have a way to mitigate the risk? If you can’t take volatility or haven’t planned on how to absorb the ups and downs in your planning, your nest egg may have to be considerably larger than you think.
- Consider inflation. How much was your first car? I bet a similar car today would cost significantly more. And that will increase as you grow older. If you concoct the perfect plan but forget to consider regular cost increases, you could be making a major mistake. The longer you will live, the more important inflation is in your planning.
- Consider taxes. $10,000,000 in an IRA is not the same as $10,000,000 held in a brokerage or bank account just in your name. It’s taxed differently- and those taxes mean there is less to spend. And in this day in age, you want to make sure you plan for changes to the tax code. Are you flexible in your income strategy, or are you prepped for today’s tax brackets and structure only?
- Consider costs of your investments. Fees in your investments are no joke- and the longer you pay high fees, the more they eat into your income stream and your nest egg itself. Don’t be afraid to pay for value, but don’t waste money.
- Consider how much longer you have to make a difference. If you are still working, or able to work, you can add to your egg, or just delay withdrawals, which can also make a big difference in how long it can take care of you. If you aren’t able to work, you can hopefully adjust your lifestyle enough to keep your egg lasting longer than it would otherwise. The sooner you adjust, the bigger the impact on your egg.
We said if you want a big egg, you better have a big hen. The joke is: you are the hen. You get to decide how big to lay this egg of yours that will nurture you for life. And of course, we’re happy to help. As long as you don’t make us clean up the chicken coop.