January 15, 2008

Thoughts on the Magic Number

I'M NOT GREEDY. All I want is $1.3 million.

In saying that, I do realize the reactions which will accompany such a seemingly outlandish statement. After all, Loyal Rant Readers will shake their heads and say, "Ben, what do you want with $1.3 million?" For $1.3 million is, even in this day and age, a whole heck of a lot of money. For that matter, I'd be perfectly happy if smaller amounts were to suddenly fall into my lap, such as $130,000. Or $13,000. Or $1,300. Hell, $130's enough for three good steak dinners, and believe you me, I would be psyched as all get out to discover an extra $130 in my wallet or my sofa cushions or my sweet NFL change bank or what have you. And $13 would buy me four gallons of gasoline and who could complain about that?

But I still want $1.3 million.

Why, you ask? Because that, my friends, is My Magic Number: the amount of money that, given my lifestyle, would make me Fully Independent and Accountable to No Man. As a result, I could do everything I've ever really wanted to do: travel, live someplace warm, write the great American novel and lounge on the beach all day. Not only that, I could do so on my own time and my own schedule, instead of having to arrange these things around inconvenient realities such as "work" and, well, "work." Were I ever to reach my Magic Number, I could do all these things and still have my $1.3 million last into perpetuity, which would give me a hell of a spring in my step, without having to rely on the Government or my Corporate Paymasters or what not.

The trouble is: how do I get $1.3 million salted away? What if I don't manage to do it -- will I be working until I'm 90? And do I really need $1.3 million to achieve a lifestyle worthy of having $1.3 million in the bank?

Well, the answer to the first question seems pretty clear: save, and save as much as I can. I like to think I'm doing this already, although I could probably do more. But let's say, for the sake of argument, that I'm not able to get to the magic number through savings alone. What I need is the equivalent of $1.3 million, at least in terms of the $1.3 million's income power.

If you ask me, this is the great slip-up when it comes to thinking about retirement and magic numbers and all that. It might be nice to have all that money in the bank, but people really don't necessarily need it, particularly if they've got pensions or 401(k) company matches or what have you. Plus, unless our Government officials want to end up like Rostenkowski, they'll pay out Social Security benefits even to us young folks who now view the program as a giant sinkhole. (Which it is, but in fairness, it could have been a hell of a lot worse).

I recently ran the numbers for my own personal retirement and found, much to my shock, that the age-62 payouts for retirement under my pension scheme and Social Security would account for nearly two-thirds of my target income in retirement. I was so stunned that I double-checked the numbers, but they worked out. Suddenly, My Magic Number has been downshifted a bit -- from $1.3 million to $292,154. That's the price of an immediate annuity payable for life at age 62 with a premium guarantee (thus eliminating the downside risk in the event I get run over by a cement mixer six days after signing the contract).

Suddenly, this whole "retirement" thing seems a hell of a lot more doable -- especially because getting that $292,154 should be pretty easy.

But wait, you say. What about that most pernicious of evils, the doom of men, the grim spectre, the rider upon a pale horse? Yes, of course -- inflation! Surely that must be worked into your calculations, right? Well, I hadn't gotten to that point, but let's review it.

If we assume that inflation will be at a manageable level over the next 30 years or so -- essentially a continuation of American monetary policy since 1984 -- then we can deduce it will take 2.4 times the amount of money to buy thirty years from now what we can buy today. Thus, my $292,154 works out to $701,169 -- which is considerably more than I had hoped. But it's still not $1.3 million. The good news, though, is that I can still hit that inflation-adjusted number if I keep saving throughout my thirties and get a decent rate of return on my investment in future.

The lesson from all this? You might not actually need as much as you thought you needed for retirement, especially if you factor in things like long-lost pensions and Government aid and -- one factor I specifically left out -- your prime nest egg, which for most Americans is their house. This works both ways: either you pay off your mortgage, thus reducing your outlays in retirement, or you draw from its equity during your retirement, which if you ask me isn't exactly a bad tradeoff. Ideally, you could do both with a reverse mortgage, provided housing valuations are high. Of course, I don't own a home yet and have based my assumptions on the fact I'm a renter, but that's something to consider as well.

Admittedly, I've also based my assumptions on the fact my life stays exactly as it is now, which is a bit fraught with peril. I could get married and have children, which would throw those assumptions out the window entirely, and the end result could be markedly different than what I've laid out here. But it's a start, anyway -- and even if I don't get my $1.3 million, we all need something to shoot for in life.

Posted by Benjamin Kepple at January 15, 2008 12:01 AM | TrackBack
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