By Brad Thomason, CPA
Do you remember the Six Million Dollar Man? Even though I was a kid at the time, it was not lost on me that such a sum was supposed to be essentially incomprehensible by a normal human. Later, when I was in high school, I have a vague recollection of someone associated with the military (a recruiter, I guess) pointing out, in the afterglow of Topgun, that six million is about what the US government had to invest to get a fighter pilot all the way trained. I think he told us that because he was trying to impress us. I don’t specifically recall; but I bet it worked.
Well, times change, and amounts which once seemed titanic have a way of becoming more mundane. Six million dollars is still many, many more dollars than I would want to fork over for a barbeque sandwich. Even with the sides. But it is no longer a number so big that one simply can’t wrap the old head around it. You may not have six million dollars. But the mere idea of it doesn’t utterly boggle the mind the way it did when Lee Majors was jumping around with that springing sound in the background.
I was thinking about all of that because the other day I was doing some modeling for a client, and it turned out that over the period of time we were looking at, the investment portfolio was going to need to generate about six million for the plan to work.
Now, before you start thinking that this guy must be super-rich and has a massive annual budget to go with it, I’ll go ahead and tell you, he isn’t and he doesn’t. I can’t give you any personal details, of course. But his request was more in the form of “what would it take?” rather than “what should I do with my actual savings?”
So since it was a hypothetical in the first place, I can give you the broad strokes.
There were two basic questions. The first, if a 55 year old needed an income of $120K a year (today’s dollars), what would that look like by age 70 if inflation were three percent every year? Second, assuming some Social Security, and investment performance of 7% pre-retirement and 4% post-retirement, how much starting capital (i.e. at 55) would it take to fund that scenario all the way to age one hundred?
So we grossed up the income, entered the other assumptions, and regressed the matter back to the conclusion that the balance at age 55 would need to be about $1.5 million.
That’s sort of a simplistic way to look at the matter, and if we had been trying to do more than satisfy a curiosity, we would have used additional methods, looked for corroboration and generally sought to fine tune where we could. But for this assignment, the basic route was enough to provide the necessary approximation.
While looking at the year-by-year results, we also took a look at the total investment earnings over the period. Over six million dollars, as I mentioned earlier.
Let me state that a different way: the whole exercise was going to cost just shy of $9.5 million. Being alive for decades ain’t cheap, even if you aren’t being extravagant. Of that total, the initial capital amount plus all of the Social Security was going to take out about $3 million of the total. So the investments were going to have to earn the rest.
The reason I’m pointing this out is because it is very easy to think of investment returns as just some percentage number you drop into a spreadsheet that serves to make the totals end up where you want them.
But investment returns represent actual dollars that have to be made, one way or the other.
Are you thinking of retirement in terms of “what do I need to be doing to earn six million dollars?”
In some respects the whole reason you want investments is because you don’t have to do anything for them to make money. But that, too, is just a touch simplistic for the real world. You might not have to toil in the field to make the dividend or interest payment spring into being. But you do have to be diligent about keeping the capital deployed, and thoughtful about where you put it, so that the risks inherent to the particular investment don’t lead to more exposure than your situation can reasonably abide. Investment capital represents productive capacity, but it is up to you to steer it to the places where the production can occur.
So yea, what’s your plan to make six million dollars (or whatever your number is)? I think that is a pretty good thing to think about, man.
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