Your Retirement Number

The online bank and financial provider ING is running a campaign right now about hitting ‘your number’ for retirement and how we all have a number we need to reach to be able to retire comfortably. The fascinating thing is that this is coming from a rather progressive company that is a leader in new banking strategies, yet they are promoting a concept (hitting your number) that is ancient in the financial planning world and has been proven to be flawed for a number of years now.

Here’s what the model looks like in regard to hitting ‘your number.’

The financial planner (or ING.com) ask you how much you make now, how old you are, how old you want to be when you retire and what income you want to have when you retire. They then create a couple simple formulas that are as follows:

To determine what ‘your number’ is, they take the desired income you want and divide that by a rate of return they think they can get on your money when you are retired, like 5% since you can’t be risky with it and risk losing it late in life. So if you want to have $100,000 in annual income, you would need to have $2,000,000 in savings to achieve that ($100,000 / 5%).

They take that $2,000,000 mark and put it in the following formula:

Years Until Retirement X Annual Savings X Rate of Return on Savings = Your Number.

What happens next is they take the age you said you want to retire at and subtract your current age from it and plug it into the formula above. Then they take the average rate of return they think they can get for you and plug that in. So what’s left is the Annual Savings (or Monthly) that you need to contribute to your savings every year until you retire to hit ‘your number.’

One twist is to add a spend down factor to your scenario where you tell them how long you want to have an income of $100,000 in retirement and they figure out how much is needed (less than $2M) to provide this income for a given amount of years.
The problem with this is that what if you say you want to retire at 50 and want to have an income of $100,000 for another 30 years since most people in your family die before 80. But what if you stay healthy and active and live to be 85 or 90? You are broke at 85 and have to go work at Wal-Mart to pay the bills and will probably have to move in with your kids or have them subsidize your lifestyle from their income.

This is exactly what ING asks in their planning outline, ‘Provide income through what age?’ How on earth can you know this? Why wouldn’t you strive to have it be perpetual so it covers your life without worry and can be a blessing to your kids after you leave? I’ve heard too many nightmare stories where people said ‘oh, I’ll only live to be 80, so why not enjoy all of it while I’m still here.’ And then they go on to live to be 85 or 90 and are stressed and have to change their lifestyle drastically just to survive because they spent everything they had.

Now if this sounds foolish to you, it is, but it’s promoted by many financial advisors as the best plan for you and it makes no sense at all.

The other problem with hitting ‘your number’ is how do you know what taxes will be like when you retire? What if they are higher and you have your money in a taxable account, like a 401k or IRA? Let’s say you need that $2M to give you the $100,000 a year you are living on now and it will be taxed just like your income is now if it’s in an IRA or 401k, so you’ll get the same cash to live on monthly after taxes. But the government makes a big change and increases the tax rates by 10%. You would then get $10,000 less income than you had planned.

What about inflation? Nobody knows how that is going to pan out, especially since we’re in such a high inflation state right now with Oil skyrocketing causing everything else to go up in cost. If you plan on hitting retirement in 20 years and inflation is only 2% (which is the goal of the Federal Reserve), then the value of your $100,000 income will have gone down 45.6%, meaning it would be only worth $54,400 in today’s terms.

So you see the major flaws in trying to hit ‘your number’.

So what are the alternatives?

Here are a few that I believe in:

1. Create a Cash Machine, a micro business that generates income for you based on your current skills and abilities. There are many resources on this, but my two favorite are Tim Ferriss’ book ‘The Four Hour Work Week’ and Loral Langemeier’s book ‘The Millionaires Guide to Creating Cash Machines For Life.’

2. Buy income property. Owning real estate is a brilliant hedge against inflation, because rents go up as inflation does as does the value of the property, increasing your Net Worth in the process. Also, financing for real estate gets cheaper over time on fixed loans since you pay the same every month while your rents go up and inflation causes that loan payment to be cheaper.

3. Invest in Cash Value Life Insurance. Insurance is the backbone of our society and has many favorable loopholes in it for investment purposes. The best strategy to look at Life Insurance through is the L.E.A.P. model by Robert Castiglione that is followed by a number of top advisors in the Nation.

Unfortunately, as our country moves forward through it’s maturity, there will be those that are on the government ticket (Social Security, Disability, Welfare, retirement from working for the DMV, IRS, City, State, etc) and those that create their own financial freedom through wise saving, investment and innovation. Obviously those in the latter group will have more financial freedom as has been proven throughout history.

My hope is to help save you from the perils of following the masses with not just your money, but also the rest of your life. Unfortunately, this takes work and investment in yourself with time and study, but the alternative is much worse in the long run.