My analytical golfing buddy, Howard Fuchs, was prompted to wonder what might be a reasonably sized nest egg for a comfortable retirement. The same question has become the obsession of the popular press, and the answer has now entered the lexicon as "The Number." After careful study and tedious calculations, Howard concluded that "The Number" is whatever your wife has decided it needs to be.
Meanwhile, a new book titled "The Number," by Lee Eisenberg, is one of the best books I have read on the subject. It digs far deeper than the simple arithmetic and demographic probabilities. It shatters many myths that most of us harbor with regard to how we will live the last third (hopefully) of our lives and pay for that retirement experience. Most important, it demands that we answer some questions that help us shape the quality of life in retirement.
Beyond its information and advice, the book is humorous, with a narrative style that makes it a riot to read, which, considering the subject matter, comes as a pleasant surprise.
A focus of the book is three questions we can ask ourselves and actually write out the answers:
First, if we had an unlimited amount of money, what would our ideal retirement look like?
Next, if we were told we would live for exactly five more years in good health and then die a precipitous death, how would we spend the next five years?
Finally, if we had 24 hours to live, what would we write down that we thought we had missed? What did we not get to be or do?
The first two questions are answered with pretty similar answers and focus on material wants. Answers to the third question are always qualitative. It's not a trick question. It's a trick set of questions.
When prompted to think about what is really important, planning for retirement for many people takes on a different meaning. Much of the quality of life is not necessarily tied to financial resources. In the book, this message is reinforced over and over.
Another important point from "The Number" is the extent to which a large portion of the public is clueless. This is referred to as "The Lost Years Club." The mind-set of this group is stuck in the question: "How come it's always the jerks who have all the money?"
The "Lost Years" people have made no effort to understand how to achieve financial success. I attribute this to the fact that people in this category have never experienced the sense of satisfaction that can come from having financial affairs in order as part of a successful march toward post-job self-sufficiency. The journey is the destination. Many people can't seem to visualize the smug sense of immediate gratification that comes from knowing that they are on the right track right now.
Thank goodness, the average 401(k) participant has had a force-fed course in investment basics -- and with real money to play with. It's the financial industry's equivalent of feeding geese with a funnel for foie gras pate.
But it still takes some amount of personal effort to achieve financial stability. In a roundtable discussion recently, we speculated as to how many people actually keep track of their spending by allocating all of their expenditures into various categories.
Generating this habit is the first step toward responsible financial management, but for some it can be extremely difficult. Years ago, I remember reading that Tony Curtis was told by his manager to keep track of all his expenses or he would wind up like Mickey Rooney. At the end of the month, Tony's list read something like sandwich ($1), gasoline ($5), miscellaneous ($3,456).
Investing money successfully is also very simple. All you need is a collection of inexpensive mutual funds that reflect a mix of stocks, bonds, cash and real estate. You can skip the real estate fund if you own a home.
From this mix, after retiring, you can expect to spend about 4 percent per year to use as income if you want to be certain of not running out of principal and not having the asset value eaten away by inflation.
All too often, however, we think we are better investors than we really are. A few good market years (like the past three) are all it takes for us to confuse brains with a bull market. Eisenberg quotes Warren Buffett, who said that it isn't stupidity that screws up investors; "it's not having the temperament to control the urges that get people in trouble."
To this, I would add that the current baby boomers include many who realize that they will be falling short of "The Number." The stage is set for some bad decisions made in a desperate attempt to shore up retirement resources. If something sounds too good to be true, it probably is, but many will be tempted by what looks like a quick buck.
The recent rush to buy ultra-leveraged residential housing for rental properties comes to mind in this respect. If the planets are lining up in a way that indicates you will be having to work well beyond 65, the best advice is to stay the course as a conservative investor and not fall prey to the temptation of what appears to be easy riches. There are no easy riches.
Cheer up. While retirement for some can be a boring wasteland, Eisenberg points out that today's music played in the common areas of most "active senior" housing developments covers the same tunes that most boomers smoked dope to in the '60s. Trust me. This new class of retirees will find something exciting to do regardless of their economic circumstances. I can hardly wait.