The Number

By Brad Thomason, CPA
 
 
It will not be a surprise to you that most people would like to know how much money they need to retire on.  It’s not a surprise, most likely, because you are one of those people.
 
The good news is it’s a number that we can find.  Or at least approximate.  But we can’t always do it quickly, and there’s always some uncertainty involved.
 
To understand why, consider a couple of scenarios involving a bucket of water with a small hole drilled in the bottom.
 
If I told you how much water was currently in the bucket and the rate at which it was leaking out, you would have little trouble figuring out how long until the bucket was empty.
 
But what if the bucket were outside, there were rain showers in the area, the neighbor’s dog might stop by for a drink or two, and the hole in the bottom was getting bigger the longer the water was draining out? 
 
Not so straight forward anymore, is it?
 
In trying to determine how long our retirement money will last, we know that we have to know how much we’re starting with and the rate at which we’ll be spending it down.  But we also have to account for the fact that the principal may earn some returns before we spend those particular dollars (i.e. like rain falling to partially refill the bucket).  We know that there might be unexpected items to pay for – probably healthcare related, but not necessarily – which can further deplete what we have (i.e. like that pesky dog).  Finally, there will be inflation; and the effect of inflation will become ever-greater as time goes on, accelerating the rate of depletion at an ever-accelerating pace (i.e. like a hole in a bucket that magically gets bigger with time).
 
If we don’t account for all of those factors, our odds of being even close with our estimates are not very good. 
 
We all want simple answers.  We’ve usually got other things to do, and even when we don’t we don’t want to spend our time breaking our heads over tedious lines of thought.  I get it.
 
Problem is, whether we want simplicity or not, little is on offer when it comes to retirement planning. 
 
In boxing they have an expression for dealing with unfavorable moments: bite down on your mouthpiece and keep going.  There’s nothing wrong with wanting it to be easy.  It only becomes a problem when the fact that it isn’t easy stands in the way of us doing it.  This is one of those areas in life – like getting hit in the face – where you need to press on in spite of the fact that it isn’t any fun.
 
If you don’t know your number, you need to.  Or at least a range which takes into account some realistic expectations about return levels and longevity. 
 
Precisely hitting projections that are decades away is not a real high-probability activity, even under the best of circumstances.  Still, you need to go through the exercise.  That’s because what you most need to know about are those scenarios which have little if any chance of succeeding, the ones in which running out early are likely or even inevitable.  Preferably you find out about them while you have enough time left on the clock to do something about them.  Which, back to the top, is why you need to look now instead of later.
 
The end of the year is coming up, and that is always a good time for some assessment and thinking.  If you don’t know where you stand, why not find out?  If you need to make some changes, start thinking them through.  And if you need some help putting them in place, give us a shout…though preferably after the first of the year.  Looking at my schedule for closing the year out over the next four weeks, it is evident that I’ll need to be biting down on my mouthpiece, too.