Feeling Like the Only One without a $500,000+ Nest Egg?

Fisher Investments, a financial advisory firm, is running an ad on the home page of the Washington Post (among others) titled, “Don’t Run Out of Money in Retirement.” The opening sentence: “If you have a $500,000 portfolio, download the guide by Forbes columnist Ken Fisher’s firm” for a “must-read guide” for “rebuilding your portfolio.” By implication, if you don't have a $500,000 portfolio, don’t bother them…

If you are feeling left out, you can take some comfort in the fact that you have plenty of company. According to Federal Reserve data from 2007 (most recent survey – before the carnage of the financial crisis), nearly 90% of U.S. households have less than $500,000 in total net worth, a number which includes non-financial assets like your home. You can be sure that few have a $500,000 portfolio for Fisher Investments to manage.

You might wonder if the numbers look much different for those in age groups closer to retirement. Not so, according to the Fed. It turns out that the median net worth of those with a head-of-household 55 and older is around $250,000. Since “median” means half have less and half have more, you can imagine that those with a $500,000 portfolio are a small fraction of those at or near retirement age.

If you find yourself in this same boat with the vast majority of Americans, take heart: a comfortable and secure retirement does not have to rely on amassing the gargantuan nest eggs suggested by the investment advisors. Millions are successfully retired on far less and you can too. The trick is to plan a retirement lifestyle within your means. You have far more control over your spending choices than you will likely have over the investment returns on your existing portfolio, so put more of your energy into researching and evaluating your spending options in retirement.

Do not let the Ken Fishers of the investment management industry hook you with their misleading and self-serving obsession with the size of your nest egg. By all means, do what you can to grow your nest egg in the time horizon you have; however, devote more of your time to focus on a solid plan for spending that nest egg. The return on that investment of your time could be far greater.

"The Number" Versus the Numbers...

You've seen those TV ads from ING, where all the characters are carrying around a large, orange number depicting the amount they will need to save in order to retire. Take a look at one of these ads, called "Nurture". I count thirteen legible "numbers" in the ad (for a few more the number can't be read). The lowest is $589,000; two others are under a million, the other ten are over a million. Looks to me like in ING's world at least, most people need upwards of a million dollars to retire.

Let's see how that compares with the real world... A Wall Street Journal article from February 19, 2011, titled "Retiring Boomers Find 401(k) Plans Fall Short" points to data indicating that boomers aged 60 to 62 have a median retirement savings of $149,900. "Median" means half have less and half have more; you can bet that the distribution is something of a bell curve, meaning that of those who have more than the median, most are fairly close to the median. All this suggests that a vast number of Boomers, the bulk of them, are unlikely to ever come close to realizing an ING type of number. Either that, or they will have to cut their current spending to the bone, save like crazy, and work well into their 70's.

Well, before we all go into despair over this condition so many of us find ourselves in, keep in mind that the messenger has a bias. ING, like all the financial houses that sell investments and insurance, would far prefer to see us build our nest eggs - which generates more and more fees for them over the long term - than to see us retire earlier with less and start spending that down. So here's an alternate thought: if we are going to have to pare our spending to the bone anyway, why not focus even more on this spending side of the equation. What if we can find a way to spend less without reducing our quality of life? What if we spent less yet actually improved our quality of life? While it takes some out-of-the-box thinking, it can be done. And, to the extent we learn to live, perhaps even better, on less today, then perhaps we don't need to save so much to live just as well tomorrow. Retirement from today's job can be closer than we might think if we master our spending.

The Retirement Worry We All Wish We Had!

     Smart Money published an article on March 11, 1011, titled "5 Biggest Retirement Myths" (also picked up in the Wall Street Journal today). The article opens with the sad tale of a retired dentist who left Colorado with his wife for warmer climes in Arizona five years ago with a nest egg of $3 million. Between the stock market crash, higher than expected insurance costs, and unanticipated travel expenses, the couple finds it must make do on 20% less than originally planned. "The golden ages aren't always golden," laments the former dentist. I know, cry me a river...
     Let's look at the numbers. A rule of thumb says it is generally safe to withdraw about 4% of your retirement assets for living expenses (then adjust a bit each year based on how the accounts are doing). On $3 million that comes to $120,000. The article didn't say whether the couple - both of whom had working careers - had started drawing Social Security benefits yet, though at full retirement age you can bet they would claim $4,000 per month or better, some $48,000 yearly. That's $168,000 total per year. Now they face a 20% reduction which would bring them to the tight budget of $134,400 annually. We should all have such worries!
      While I am certainly happy for the dentist's good fortune - and good fortune it is, whatever the relative reduction in cash flow - it contrasts rather sharply with the prospects for the vast majority of aspiring retirees. A February 19, 2011 article in the Wall Street Journal ("Retiring Boomers' 401(k) Plans Fall Short") cites data that households whose head is aged 60 to 62 have a mean value of $149,400 in 401(k) accounts (remember: "mean" means half of all such households have more and half have less...). That amount is 1/20th (5%) of the nest egg held by the dentist and his wife. Yet that is the condition of the vast majority of folks approaching retirement.
     So, if you find yourself with a financial profile that looks less like that of the dentist and more like that of, well, just about everyone else nearing retirement (otherwise known as "the rest of us"), this is disheartening news. However, don't despair. Retirement may not be nearly as out-of-reach as it seems. We'll explore alternatives in the days ahead. In the meantime, keep your dreams alive!