Retirement Planning: How Much Money Do We Really Need?

I want to win the lottery. As I write this, the Powerball lottery is at $450 million. The cash value option is $304 million. I know the odds aren’t exactly in my favor, but if I win, I’ll rest easy that I can retire in comfort.

Short of winning the lottery or some similar event, I worry about having enough money to last the rest of my life.  Even though I save and invest, and I have many years before I check out of the workforce, I’m still concernrned.

I think most people share this worry.

A few years ago a popular book, The Number, set about finding the answer to the question of how much we need to retire, but it never really solved the puzzle.  Like so many financial advisors (who are good at their jobs, don’t get me wrong), books on this subject start by asking consumers to outline their anticipated expenses in retirement, as well as their assets.

Then it becomes a game of math.

If you invest for X years and earnrn Y% returnrn, then you’ll have Z amount to meet your expected obligations.  But what if I can’t work for all of X years, or my returnrn falls short of Y%? Then Z is sure to suffer.

At some point we all realize that if we do this wrong and end up short of funds, then our quality of life in retirement will go down the drain.  By that time we’re past our working years, so there’s not much we can do about it.  We don’t get a second chance to build our retirement savings.

Those are scary thoughts, indeed.

Think about the craziness of preparing for retirement.  We are told to put away enough money so that it can grow to meet our needs.  OK, so start with an easy question like, “How long will we be in retirement?”  No one knows (hopefully!), so we have to guess.

How much will we earnrn on our investments?  Again, no one knows.  The long-run average returnrn on large-cap stocks is about 9%, but the actual returnrn in any given year can be wildly different.  And don’t forget that once we reach retirement, we have to decide the rate at which we take money from our accounts, which is another guess.

With something as important as the quality of our lives during our retirement years hanging in the balance, we have to guess at major components of our planning – the time frame, the returnrns, and the rate of distribution.  Somehow this doesn’t give me a warm fuzzy feeling.

The anxiety I feel, which is shared by so many, is leading to some interesting outcomes.  Robert Shiller wrote in the New York Times that this anxiety is driving investors to chase assets, buying them at almost any price simply to have their money invested.  Fearful of losing the value of time in the markets, we rush to buy stocks and bonds that have already moved up in price.  Shiller’s point is that, through our anxiety, we drive asset prices to lofty levels.

These same concernrns could lead us to consume less and save more, which only makes matters worse by increasing the amount of cash chasing investments.

This all might be true, but what’s the alternrnative?  We know Social Security won’t meet our needs, and there aren’t many parents just rushing to move in with their adult kids.

As I started thinking about this the other day it struck me that what many of us crave is the defined benefit plan that so many of our parents enjoyed.  We want guaranteed income for the rest of our lives with no hassles and no worries.  We want to put the risk of investment loss or tortured planning over time horizons onto someone else.

With that in mind, I went looking in the area that I figured had already solved the issue – annuities.  Sure enough, something like this exists.

Before you roll your eyes or click away, understand that I’m not pushing anything here; I’m just noting what I found.  And nothing is without drawbacks.

The classification I came across was deferred immediate annuities, or DIA’s.  These contracts allow consumers to pay a premium today and defer starting their guaranteed payments until sometime in the future.  I called my friend Terry Reid who works with MassMutual for more details.

She told me their product allows the investor to put down $10,000 and choose any time from just over a year to 40 years in the future to begin receiving payments.  In between the initial investment and starting the payments (but not less than 13 months before payments begin), investors can kick in more money in increments of $500.

There are many variations on this basic structure, but they all come with risks.

The money is not accessible before the payment stream begins.  Unlike my portfolio of stocks and bonds, I can’t access these funds if the need arises.  Also, the guaranteed payments are only as good as the company behind them.  What if something happens to the insurance company?

At the end of the day, it all comes back to the same thing — there is no simple solution to preparing for retirement.  The workbooks and quizzes that help us estimate expenses have their place, as do stock and bond portfolios, but we shouldn’t overlook some less traditional avenues like DIA’s , which can provide stability and continuity in a world filled with uncertainty.

The answer to the question of “How much do I need?” is simple: more than I have today.  And I need it spread among different types of investments and opportunities, so that if any one thing fails, it doesn’t sink the whole ship.

Unless I win the lottery… then it’s all T-bills and tequila!

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