How Would You Answer This Million Dollar Retirement Question?

June 09, 2017

A recent article in the Wall Street Journal asked a question that has led to one of my favorite conversation starters, both with clients and over beverages at my local watering hole: “Would you rather have $1 million or $5,000 per month in retirement?” To me, the way a person answers that question tells me a lot about how their mind works around money. So far, the answers I get are split about 50/50. Here’s what I’ve learned:

I’ll take it all right now, please.

Those people who choose the lump sum tend to have a strong belief in their ability to be fiscally sound. When asked what they’d do with the money, they typically say that they would pay down every penny of debt, make a luxury purchase or two, then live fairly frugally to preserve the remaining money, while investing it to get some growth. Their hope is to be able to grow that initial lump sum well beyond the starting amount and also do some good in the world.

I’d rather keep a steady paycheck.

On the other hand, the people who say they’d rather have the monthly income tend to be wary of becoming one of those tragic stories about people who “had it all” and then blew it. They feel like they can live on the monthly income with ease and save a portion of it for future generations or charitable work. The WSJ goes into the psychology of this choice, which is something called “the illusion of wealth” versus “the illusion of poverty,” but you’re better off just reading the article to understand that one better.

Are you focusing on the right number?

Why do I mention this debate? So many people that I have talked to regarding retirement are completely fixated on getting to some “magic number” in their 401(k) before they’ll feel safe to retire. When I meet people who are locked in on needing X number of dollars in order to retire, they are almost always already in excellent shape for retirement. Why? I find that they’ve been so laser focused on the dollar value of their accounts that they haven’t really thought about the monthly income that the portfolio could generate.

In many cases they’ve saved enough that they can afford to have a higher monthly income than their current income! I can’t count the number of times I’ve told someone that they can walk back to their desk because they are choosing to, not because they need the paycheck.

The number that counts.

When we prepare retirement projections, the most important number – in my opinion – is the monthly income that a person will have from all sources (Social Security, pension, investment accounts, retirement accounts, etc.) during retirement.  After all, most people have a lifestyle that requires a rather consistent monthly income.  If that income, plus some, can be replaced today – work truly becomes an option, not a requirement. 

Find your number.

What can you do? Run retirement projections at least annually. This is probably the most important thing anyone can do to track their progress toward financial security. After a few years, your projections should show a trend. If you’re doing things right, you’ll see that trend improve with each year. When it doesn’t, you can decide what actions to take in order to get the trend line back to being a positive. Regardless of your stance on the question of a big lump sum vs. a steady monthly income, running a projection to see how much income you can expect to have in retirement will help you determine a lot of financial decisions between now & then. To steal a line from Nike: when it comes to running retirement projections, JUST DO IT.

3 Lessons Millennials Can Learn From Previous Generations

May 26, 2016

With the recent release of our research report on the generations, our current Think Tank Director and former Financial Finesse blogger Greg Ward makes a second appearance to discuss what millennials can learn from previous generations…

I recently received an interesting call from a young woman asking how much the average person her age has saved for retirement. She was 35, and while I understand the nature of the question, I think it is a very bad one to ask. You can search “how much has the average 35 year old saved for retirement” and you’ll find a variety of articles (e.g., The Motley Fool and Personal Capital), but comparing yourself to others is a recipe for creating false expectations. Not only that, but the average balance is based on the average American who makes an average salary, and this is a terrible benchmark when it comes to planning for retirement. As our latest retirement research points out, less than 20% of Americans are on track to achieve 80% income replacement—a reasonable goal for most people—so why on earth would you want to measure your progress to this?

I find it interesting that millennials feel the need to compare themselves to other millennials. Wouldn’t it make more sense to compare themselves to older generations or at least listen to them? Ask any pre-retiree what they wish they had done to be better prepared for retirement and most will tell you that they wish they had started saving earlier. So while some may think that saving money in your youth is a waste of time, older generations will tell you it is the best way to achieve financial independence. Here are three things I want the next generation to know when it comes to planning for retirement:

#1 Save early, save often, and save as much as you can.

Albert Einstein is known to have called compound interest “the eighth wonder of the world,” so what could be smarter than listening to one of the smartest people who ever lived? The more you start with, and the earlier you start, the more you’ll have later in life; pretty simple, huh? The more you save when you’re younger, the more you will have when you get closer to retirement, which gives you more flexibility in what kind of work you do, how long you do it, and what kind of lifestyle you’ll have when you are done.

#2 Be aggressive.

Piggy backing off of number one, don’t let youth be wasted on the young.  You may be nervous about stock market fluctuation and who can blame you? After all, you witnessed several of the most volatile stock and real estate market years in recent history. That said, you have the most opportunity to recover from these short-term events, so you must take advantage of your youth and save with the intention of keeping this money invested for a long, long time. The longer you can keep money in the stock market, the more likely you will see the types of returns that have been produced historically.

#3 Stop comparing yourself to others.

Some will make more and have to save more. Others will make less and not need as much. Some look forward to a simple lifestyle. Others plan to live the high life. Higher income earners will receive less from Social Security as a percentage of their income than lower income earners.

YOU are unique! You have to plan your life around who you are, how much you make and what you want your future to look like so the best thing you can do right now is decide for yourself what you want your retirement to look like and plan accordingly. Then use this retirement estimator to determine whether or not you are on track.

As my oldest of four children prepares for college, these are the things that I am teaching her. Now I offer them to you as well. If you, the next generation, adopts these principles, you will give my generation hope that the impending retirement crisis will likely be averted.

One Of The Most Important Financial Steps You Can Take

December 04, 2015

During our preparation of Thanksgiving dinner, my kids and I had a conversation about our family. There have been a lot of changes in the family over the last year or so. There have been several deaths, several births, several weddings and a few events that I’m probably forgetting as I write this.  Continue reading “One Of The Most Important Financial Steps You Can Take”

5 Retirement Questions You Need To Ask

September 21, 2015

When do you plan on retiring? When I ask this question during financial wellness workshops and webinars, I find that most people have at least a ballpark idea of when they would like to have the freedom to quit work. In fact, some people completely light up with a lightning fast response of “yesterday, today, or tomorrow” when I ask about that desired retirement date. For most of us, retirement is a top financial priority and there can be a difference between “desired” retirement dates and the actual realistic target date for retirement. Regardless of what your vision of the ideal retirement may look like, here are five basic questions that should be at the heart of all retirement planning activities: Continue reading “5 Retirement Questions You Need To Ask”

Retirement: You Might Need to Visualize It to Realize It

August 25, 2014

As a financial planner, I feel that it is important to encourage people to realistically think about what their retirement will look like. No matter how young or old, now is always a good time to plan for the future. It is not uncommon for some of these popular questions to come up during a typical conversation: Continue reading “Retirement: You Might Need to Visualize It to Realize It”

What’s Your Magic Number?

May 16, 2014

By “magic number,” I mean how much money will you need in order to retire comfortably?  Without giving away too much, let me answer briefly.  A WHOLE LOT!!!! Of course, it’s going to be a different number for each of us and there are countless ways to arrive at a number that makes sense for your life  so my goal here is to try to help you figure out a reasonable estimate of what you might need without having to run numbers on a spreadsheet or a website that may or may not be worth the time it takes to prepare the estimate.  I’m not saying it’s going to be super-easy but at least it won’t require much math! Continue reading “What’s Your Magic Number?”