The Number A Completely Different Way to Think About the Rest of Your Life AUTHOR: Lee Eisenberg PUBLISHER: Free Press DATE OF PUBLICATION: 2006 NUMBER OF PAGES: 288 pages
Do you have enough money to shelter you for the rest of your and your family’s life? Does this question nag at you in the middle of the night, as you continue to approach retirement, or as your kids near college, or as you worry about being able to make it through a sudden illness or family crisis?
“ The Number” by Lee Eisenberg helps you find out what your number is, or the amount you need for your nest egg, and how to go about making it. Through practical tips and insights, Eisenberg helps you define what you really want and how to achieve it as you approach later life.
THE BIG IDEA
The Eisenberg Uncertainty Principles
Most people today can hope to live longer than they ever figured. What are the chances that you’ll live out your days in comfort? Retirement may be just around the corner, or it may be a long day off. As you approach middle age, however, you can’t help thinking about money for your future.
The truth is, however, that most Americans put aside barely a penny out of every dollar they earn. Instead, these people are spending money like crazy. And most also do not think about the future, and saving up for it. Others may feel anxieties, but don’t know how to go about doing something about it, much less talk about it.
Why? Because of the Eisenberg Uncertainty Principles:
--The uncertainty that results from living in a society and culture so steeped in the moment, and awash in debt, that there’s little social or peer pressure to get one’s financial house in order.
-- The uncertainty and lack of motivation because you do not know how money works.
-- The uncertainty caused by knowing that the old retirement support systems are withering away. -- The uncertainty caused by the immense cloud that hangs over future retirement benefits: bankrupt corporate pension plans, what an angry stock market god might do to smite private retirement savings plans. -- The uncertainty that comes from failure to see the larger picture in all of the above -- The profound uncertainty over what truly matters at the end of the day The Eisenberg Uncertainty Principles
Whatever your age is, but especially if you’re nearing middle age, it’s time to start thinking about what your Number is. The Number is about net worth, the Number offers the assurance that you won’t starve when you retire and no longer get a paycheck. The Number signifies that loved ones will be taken care of, after you pass on. The Number is also a validation of career success, the ultimate performance bonus.
It’s Time To Start Thinking About The Number
Where Do You Stand?
Most people are procrastinators. They reach their forties, even fifties, with no financial plan in hand. Others are Pluckers; they have a very specific Number in mind. The problem is, they plucked this Number out of thin air, with no logic or plan behind it. Plotters are those who are familiar with the stock market and other financial data, and are determined to save and leave something behind for their families.
Finally, there are the Probers, highly developed people who see the Number not as an end but as a means to finance inner journeys and fulfillment.
Whatever kind of person you are, you probably don’t know the answer to the question: Where Do I Stand? Your income gives you a partial answer. If you’re earning $40,000 a year, you’re doing better than half the households in America. If you’re household income is $170,000, you’re among the nation’s top 10 per cent wage earners.
When Two Million Isn’t Enough
Many Americans can have a million dollars, even two, and still feel as if they’re scraping bottom. Consider what happened to a fifty something doctor featured in a Wall Street Journal article. He retires from practice due to ill health, and thinks it’s okay because he had saved up to $2 million dollars. Within seven years, however, bad things befall him:
-- Stock prices tank, and along with them about a third of the doctor’s retirement savings
-- The doctor realizes after retiring that his pre-retirement calculations were wrong. They were based on the assumption that he would not be obliged to pay income tax on money withdrawn from tax-deferred accounts
-- His health insurance premiums go up about $100 a month. Not only that, he begins to pay premiums on long-term-care policies he and his wife decide they need.
-- The property taxes on the tranquil retirement home he and his wife have purchased – a modest enough place, but on twenty-two acres, turn out to be considerably more than they paid when they lived in their suburban home.
The New Rest Of Your Life
In the old days, the drill was you worked till sixty-five and then you retire. And you could count on social security and your corporate pension for the rest of your life. In short, it was about others taking some responsibility for you in return for what you have given in your working years.
Today, however, it is all about taking care of yourself. By 2019, the number of taxpaying workers relative to those collecting benefits will be so uneven that unless the Social Security system is changed, it will be unable to deliver benefits to everyone.
That’s why increasingly, personal retirement plans are the rule. The shift from defined benefits (pensions, social security) to defined contributions (personal retirement plans) is regarded as “one of the most dramatic transformations in the economy over the last two decades.
For forty-two million people, the defined contribution plan of choice is the 401(k) and there is about two trillion dollars invested in the 401 (k)s. Under such plans, employees and employers contribute a set amount. The individual bears all the risk as to how, or whether, these investments grow – employers bear zip.
What this case shows is that you need to smarten up about money if you intend to avoid this trap. How do you actually come up with the right Number?
Most people think that you can arrive at your Number simply by calculating a percentage of your current pre-retirement income. The assumption here is that it costs less to live in retirement than it does to live while you’re working. You no longer have your kids to support, you don’t have to commute to work, or buy new clothes frequently. Consequently, some experts say you may need only 70% of what you used to earn.
But this method of calculating your Number is flawed. You need to consider more. How healthy are you right now? How many dependents do you have and what are their ages? How important is it to you to leave money to them or to a good cause? How safe is your company pension, and is it indexed to inflation? How and where exactly do you want to spend your retirement?
Setting an accurate Number is complex, given all the risks and variables. It takes more than a little computing power to project investment returns, life expectancy, inflation trends, health care costs.
How Do You Calculate Your Number?
One way to calculate your number is as follows:
Total up your invested assets (assuming they’re well diversified, i.e., 60/60 stocks-to-bond ratio)
Multiply A by .04, which tells you how much annual investment income you might reasonably withdraw each year
Add in the annual value of any home equity you have (to do this, divide your total equity by the number of years you expect to live. For example, if your age is sixty, and you have $400,000 in home equity, and expect to live to be one hundred, the annual value of your real estate would be $10,000)
Add any income you expect from any inheritance (again, total inheritance divided by the number of years you expect to live)
Add the amount of Social Security you assume you’re entitled to per year (for help, visit www.ssa.gov )
Add any expected annual pension benefits
Add any remaining income you expect, such as from part-time work or other sources
Total B through G, and you arrive at how much you can safely spend each year to get through the rest of your life.
How Do You Calculate Your Number?
One is by common sense and belief in a time-honored precept: it is impossible for anyone not to wind up wealthy if he or she consistently saves 10 per cent of every dollar that comes in. The principle behind it is: you pay yourself first. Before Prada, before Diesel, before John Deere and any other brand you’d like to buy.
Roger Servison, head of strategic initiatives and a top Fidelity hand, answers the question, “How do you keep a portion of your assets growing while at the same time drawing down funds to live on?” He said, everyone should cultivate a new mindset, a more holistic view of our lifetime income.
This means a well-planned lifetime consists of an accumulation phase, during which you work and save for the future, and then a distribution phase, in which these assets are drawn down in an appropriate way, with taxes and other considerations taken into account.
A new mindset and new tools could come together in a new strategic initiative.
How Do You Get To Your Number?
The best financial advisers are thoughtful and pragmatic, don’t take themselves too seriously, and are confident enough in their knowledge that they need not hyperventilate when issuing advice.
In getting a financial adviser, make sure you ask the right questions before entrusting him/her with your Number. The National Association of Personal Financial Advisors has posted a long questionnaire on its Web site that you can download and ask a prospective adviser to fill out and return to you. The answers will give you an idea of what you’re getting into. Asking someone to fill it out has the added value of letting him/her know that you mean business.
Getting Advice Or Doing It Yourself
Most people get nervous about investing in stocks, due to the volatile nature of the stock market. They are averse to risk, there are too many choices that it’s confusing and difficult to understand. Over time, though, its important to know that stocks will return higher gains than bonds, bonds will return more than money funds, and money funds will return more than a mattress.
There are ten commandments you should remember when investing in stocks:
-- Thou shalt not put all thy eggs in one basket
-- Thou shalt have the patience of a nesting hen
-- Thou shalt know that past performance is no guarantee of future results, nor shalt thou become so exuberant so as to forget that eggs drop, cookies crumble, bubbles burst, and that which goes up will eventually come down
-- Thou shalt not invest in anything thou does fail to understand
-- Thou shalt not question the divine power of compounding interest
-- Though shalt not squander long-term returns by incurring frequent trading commissions or excessive management fees
-- Thou shalt take on risk commensurate with thy ability to sleep at night
-- Thou shalt honor thy age and timeline by properly apportioning thy ratio of stocks to bonds
Don’t underestimate inflation. A 3 per cent annual inflation rate over twenty-five years means you’ll need twice as much buying power to live then as you do today. If you’re forty years old, and it takes $200,000 a year to support your standard of living, it’ll take $400,000 when you retire at sixty-five. If inflation runs at 5 per cent, you’ll need something approaching $600,000.
Inflation ranks as your Number’s biggest dangers because it gets you coming and going; the value of your holdings diminishes while at the same time prices go up.
What is in your control is how you can allocate your investments to help defend yourself against all the risks you can’t control. Your spending is also in your control, barring extreme surprises. It’s likewise in your control to hold to a reliable formula as to how much you can safely withdraw from your assets each year once you stop working.
Don’t Forget Inflation
We live in an age where everything is monetized, everything has a price tag. But a new breed of financial planners is bucking this trend to think constantly and only about money. That people should take a more qualitative view of money. Money and the spirit are connected. Money and meaning must be brought into alignment.
The psycho-analyst Carl Jung wrote that the second half of life is the time to reflect. Midlife is the time to let go of the overdominant ego and reflect on the deeper meaning and significance of existence. So while you’re calculating your Number, and planning to go about achieving it, don’t forget about living a meaningful rest of your life as well.
It’s Not All About Money
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