Less than a year after my wife Jo and I were married, we pooled our resources and went into business for ourselves. I was in my late 40s, and it was a huge gamble. If it did not work out, we would have little time left to recover before we wanted to retire. If we had really screwed things up, I might still be working fulltime today.
That was around the time the first PC came out and launched us all into the computer age. It was a handy tool when it came to correspondence, billing, and record keeping. Our accounting program also had a tab labeled “retirement planner.” By today's standards, it was rudimentary. You entered data, and made some assumptions regarding inflation, savings, investment returns, and retirement lifestyle. It spit out a report that basically told you if, when, and how well you could retire.
The first time I ran the numbers, the program said I was good to go as long as I didn't live past my mid-70s. What a horrible thought! From there, I backtracked until Jo and I found our magic number—the number we had to hit to retire comfortably, the way we wanted to.
Many of our friends did the same thing. We each had our magic number, and after that planned to retire without a care in the world. I mean, the computer showed that if we just invested in safe CDs paying 6% we would have plenty of money. What could possibly go wrong?
Our generation took those projections to heart. Once, while on an extended motorhome trip, Jo and I stopped into a laundromat just outside of Kansas City. We were alone with a week's worth of laundry spread among several machines. I plugged my notebook computer into the pay phone and updated our brokerage account. For the first time ever the balance rolled over our magic number.
It is hard to describe how I felt at that moment. I couldn't speak, and tears streamed down my cheeks as I walked over to show my bride. She looked at the number, threw her hands in the air and screamed, “YES!” as we hugged and jumped up and down.
Hitting our magic number was a fantastic milestone for us, as it has been for many of our peers. All the 60-80 hour work weeks, tosses and turns in the middle of the night, and struggles to keep our financial house in order had finally paid off. We would never have to worry about money again. We were home free… or so we thought.
Now, twenty years later, our account balance is many times higher than our original magic number. We have come to grips with the fact that our magic number was aptly named. We had forgotten what magic really is: an illusion. In reality, our magic number was nothing more than ink on a sheet of paper that made us believe something that was not true.
Sophisticated magic numbers are still rough estimates. Recently I was working on a project with my friend Jeff White, who is the president of a large, independent financial services group. He was talking about something called a “funded ratio,” which his team uses when people come in for a financial checkup. He showed me a hypothetical client report card, which contained a line graph that ran up to a certain dollar amount. It was pretty straightforward: if a client's portfolio meets or exceeds that number at their planned retirement age, they should be able to retire in the lifestyle they hoped for. There it was—the magic number.
While the program his firm uses is very expensive, much more sophisticated, and uses Lord knows how many more variables, at the end of the line the process is the same. In essence, it tells his clients where they need to be, how much they need to save to hit their magic number, and how much they can draw down each year while still making their money last.
Just for fun I said to Jeff, “So if the client saves as you suggest, then when they retire with this amount of money, they never have to worry about money again, for the rest of their life?”
He responded with, “As long as inflation is not higher than our projection, fixed-income rates don't fall through the floor, the market does not crash, Social Security stays the same, the government doesn't raise taxes, healthcare costs don't go through the roof, etc.” Then he realized I understood that all along and started laughing.
We still have to plan in the face of uncertainty. Recently I had a discussion with my baby boomer children, all in their 50s. These days they have the same concerns Jo and I did when we bought our first PC. I explained to them that they need to start their retirement planning now—or better yet, yesterday—and a financial checkup is a good place to start. Like most of us, they will probably have to get serious, start their own austerity programs, and save a larger portion of their income. Hopefully they establish savings goals just like Jo and I did and smile with pride each time they hit a target.
At the same time, they need to realize that those are just numbers on a sheet of paper. Much like a business manager who has certain profit targets or a salesperson with annual sales goals, we are still responsible for doing the hard work to hit those numbers. Working our butts off to make those numbers is the hard part. Our money will not manage itself in the build-up phase toward retirement, nor after we have retired, and we need to make it last.
Jo and I were duped into believing there was such a thing as “set it and forget it” once we retired. Now I tell my children there is a new rule: “Forget it and you will lose it!”
I also told my kids that even though they contribute regularly to their 401(k)s, there's much more to retirement planning. They need to start their financial education now and not fall into the trap so many of my peers did. Too many of my friends waited until they got their gold watch and lump-sum payout before learning about money management. By then, they were scared. I've heard too many of my peers make comments like: “My god, what do I know about money?”
My kids will say: “Dad is prone to lecturing from time to time.” I just grin and say I'm doing my job. I offered my children complimentary subscriptions to Miller's Money Forever under the promise that they would actually read it. Now they are coming to me with questions, and I like that so much better than giving them lectures.
When all is said and done, we all have to look after our own money. Just like Elvis, the magic has left the building. While we can't offer magic solutions, we can help you build your wealth and look after your nest egg to make sure it stays intact after you build it up. The days of “set it and forget it” and 6% CDs are long gone. Sign up for a free trial to Miller's Money Forever for a helping hand on your retirement journey.