As we flew out of Phoenix, a flight attendant pointed to the book I was reading, "The Number" by Larry Eisenberg, former editor of Esquire magazine. “Oh, that's the book that got them upset on TV this morning!" she said. “The Number” is a disturbing wakeup call about our retirement security — or lack of.
To me, financial security means enough to live on comfortably for the rest of your life, without working, and with a low risk of losing it. Eisenberg’s book asks "How much is enough?” or as he puts it, “What is your Number?"
Eisenberg warns that we don’t pay enough attention to our Number, and our Number is BIG. Few save. Too many spend as though we'll work and earn forever. Bumper stickers declare that retirees are spending their children’s inheritance. Eisenberg fears too many not-yet-retired are spending their retirement security.
Many in my generation are already retired on private or government pension plans that guarantee retirement income for life. Old-fashioned employers took care of their Number. That was great while it lasted, but it hasn’t. Guaranteed plans are frightfully expensive and private companies are chucking them. Some are being frozen (IBM), others chucked in bankruptcy (the airlines). Even a few governmental units, like towns or school districts, have filed bankruptcy because they can’t pay their pension benefits.
Few baby boomers (other than government employees) will get guaranteed retirement income. At best, boomers are building up company-sponsored retirement savings, like 401K plans. At retirement, they’ll draw on whatever’s in their account. Boomers are solely in charge of their Number.
My boomer client Tom owns a very successful business. Tom has pulled money out of his company and socked it away in a solid investment portfolio worth $5 million. Tom thought $5 million was his Number. Tom works hard and lives well. He could have easily dribbled away that $5 million on vacation homes, luxury cars and such, but he didn't. Had Tom left that $5 million in his business, it might be larger and more profitable today. But his Number would be wholly invested in his company, and that’s too risky for Tom.
If Tom’s company folds, will his $5 million portfolio be a big enough Number? Money gurus counsel not to count on drawing down more than 4% annually from your Number. Four percent of Tom’s $5M is $200,000. Yikes, Tom is spending much more than that to live on, not counting his company expense account, company car and other perks! Real retirement security for Tom would mean cutting back on his lifestyle spending, or else enlarging his Number.
If you’ll need $50,000 annually in retirement, your rough Number is $1.25 million. That’s $50,000 divided by .04, the 4% draw down. But don’t panic yet, says Eisenberg. Part of that $50,000 may come from an anticipated inheritance, Social Security, your annual pension benefits, and expected income from part-time work after retirement.
Eisenberg doesn’t provide a recipe for calculating your Number. Instead, he suggests you huddle with a qualified financial planner who focuses on your Number instead of commissions. His book can help you find the planner you need and avoid the planner you don’t.
A wellness talk host show reminds women they’re likely to live thirty to forty years beyond menopause. A key component of your Number is calculating your anticipated life expectancy. Eisenberg cautions not to underestimate it. Women and men may live decades after retirement. Eisenberg is concerned not only with sufficient net worth, but fulfilling our “life worth”. Once we begin drawing down our Number, how can we find richer meaning by “downshifting” into retirement? Stay tuned. We’ll explore Eisenberg’s “life worth” suggestions next time.
Source: “The Number: A Completely Different Way to Think About the Rest of Your Life” by Larry Eisenberg (Free Press 2006).