Saturday, June 29, 2013

A $2.5 Million Dollar Rant

I recently worked with a married couple to help them develop a retirement plan. They have no children and have been able to save a whopping 2.5 million dollars for retirement. Let’s call them John and Sally to respect their privacy.

Two and a half million dollars is a lot more than most families have been able to save. Less than 10% of U.S. families approaching retirement have even saved $200,000 or more and about half have been unable to save anything at all for their “golden years”. For most Americans, our retirement system doesn't work.

In our initial discussions, John and Sally told me that they believed they would need about $55,000 a year to retire on. I was able to show them that they can probably (a key word that I'll come back to) spend much more than that. Possibly twice as much.

So, I was quite surprised a week or so later to receive the following e-mail that John later described as a “rant”. (I tweaked it a bit to protect their privacy.)
“I feel a little discouraged with the $77K discretionary income figure (compared to our living expense today at $50K) especially considering 1) Sally's Social Security amount may be over-stated, though I hope not, 2) we have not set aside anything for long term care expense best I can tell, and 3) we're not paying the full freight on healthcare today. 
Not quite sure how the average Joe is supposed to prepare for retirement. We have not had any children (of course we weren't married until Sally was 48 and I was 55), I've saved about all I could most of my life. Sort of discouraging. Thanks for listening. We'll be back in touch with Sally’s Social Security verification. John”
I’m not sure how the average Joe is supposed to do that, either, John. A couple of kids would have pared down your savings a ton.

We were running some worst-case scenarios through E$Planner and the initial forecast of their discretionary income had dropped, not surprisingly, from $128K annually to $77K when we lowered the stock market return estimate to 2.5% per year. (Note that the “worst-case” forecast was still $22K per year higher than the $55K they believed they needed.)

On the plus side, Sally subsequently called the Social Security Administration and confirmed that the benefits estimate I provided her was correct and not overstated, even though it was significantly higher than what SSA had originally estimated for her. Furthermore, we showed that their long-term care risks were already well mitigated.

As for health insurance costs, I shared their concern. For people retiring before becoming eligible for Medicare (John wants to retire at 59), I believe health care costs are the greatest risk, but a retirement plan can’t completely eliminate all risks. If you retire, you will face some risk. If you can't live with that, you need to keep working.

All things considered, Sally and John are in better shape to retire than any client, family member or friend that I have ever spoken to on the subject.

Why, then, was John frustrated?

I’m pretty sure it’s because he wanted to be assured that no matter what might happen over the next 35 years, their finances would survive. All of us would like to think that if we could save two or three million dollars for retirement our worries would be over. 

And most of them would be. But retirement is a probability, not a certainty.

Sure, billionaires have an extremely low probability of going broke before they die, but it isn't zero. Nelson Bunker Hunt and his brother, William Herbert Hunt, were Texas billionaire brothers whose fortunes collapsed after they tried and failed to corner the silver market in 1980. Nelson was 54 at the time, just a few years younger than John.

Donald Trump has filed for bankruptcy four times.

Retirement has lots of risks, and big ones that are game changers. There are investment risks, the risk of living a very long time, health care cost risks, long term care risks, interest rate risks, inflation risks. There is a risk that Social Security benefits will be reduced.

All these risks are exacerbated by the fact that once you retire, you have little opportunity to recover from a financial catastrophe by going back to work.

It isn't possible to retire and completely mitigate all risks, no matter how much you've saved. At some point, you're going to have to hope you are as prepared as you can be and take the plunge.

But John and Sally are better prepared to deal with these risks than perhaps 99% of the U.S. population. They worked hard and saved a ridiculous share of their income. They didn't have kids. They live well below their means and their spending expectations in retirement are modest.

So, the question isn't “why are John and Sally discouraged and outraged?” 

The question is “why isn't everyone else?”


  1. I agree with a lot of what you say, but not necessarily the spin you put on it. Many of the problems you identify are simple economics. You cannot expect a guaranteed good return in the stock market. In fact, you can't expect a good real (i.e., after inflation) return without some risk. We cannot repeal the laws of economics when they are inconvenient. Risk is a given in life -- any of us could be hit by lightning or by a meterorite tomorrow. There is no point in complaining about uncertainty; all we can do is manage it as best we can.

  2. I think you reiterate my points perfectly. Thank you. I suspect there is a point you would like to argue, but I can't find one with which we disagree. I certainly agree with every point in your comment.

    The point of this column, and in fact of my entire blog, is that not only is it pointless to complain about uncertainty, it's pointless to complain about whatever problems may have led you to inadequate retirement savings. Like it or not, you are here. I try to provide advice to help you manage your future as best you can.

  3. I keep in mind the trend of spending less money the older we get helps. I assume some of that has to do with just not being able to get out there and do it as we get older.

    1. According to a study by EBRI entitled Expenditure Patterns of Older Americans, 2001‒2009, household expenses steadily decline with age. With the age 65 expenditure as a benchmark, household expenditure falls by 19 percent by age 75, 34 percent by age 85, and 52 percent by age 95.

      Of course, not living to age 95 reduces the cost of retirement, too, but not necessarily in a way we would prefer.

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  5. I have 2.6 million plus 48,000 pension. I am 71 1/2 and have zero debt. I pay 33 percent tax when take out of IRA. I don't feel rich at all.

    1. You aren't what I would consider "rich", either. On the other hand, you're wealthier than about 98% of retired Americans, so maybe we're both wrong.

  6. The only way to have a truly 'guaranteed retirement' is to save - in CASH enough money to support your spending until you die. That is my plan, 100% of my wealth is in cash and I have about 50 years of spending ($3MM) already saved at age 51.

    1. Unfortunately, that's not guaranteed, either. You have 50 years of spending saved if you don't have unexpected future expenses. I was just told a story about a wealthy Fortune 500 exec who had a lot more than $3M. His wife developed Alzheimers and the cost of care bankrupted him.

      If you save only in cash, you will have significant inflation risk exposure. I don't recommend your strategy.

      There is no way to have a truly-guaranteed retirement because there is no way to guarantee your future expenses among other things.

      Thanks for commenting!

  7. Hopefully John and Sally had a large chunk of their funds tied to the market for the last 5 years. I would suspect even if they were 50/50, then their portfolio has still jumped pretty darn high. How about an update!

    1. That's like winning four hands of blackjack and proclaiming that you are a great blackjack player while ignoring the average 19 prior hands you lost.

      On average, you will do better in the stock market but whether or not you will be average is uncertain. Whether you will do better or worse than the average (expected) return is a coin-toss.

      Would you have asked this in 2009?