People who make their wills can be such pessimists. They ask, “What if I died today? What happens to the kids? How much are the estate taxes?”
But what if nothing bad ever happens? What if you live happily ever after? In that case, the questions are simpler and, perhaps, scarier.
Retirement is Expensive
How much money would it take for you to quit work and retire? If you’re already retired, what’s the smallest portfolio needed to maintain your lifestyle? This is your core capital requirement. It’s enough money so that you never run out, but you don’t leave much, if anything, for heirs.
Your sustainable spending rate is the percentage of your portfolio you can spend each year in retirement, accounting for inflation, taxes, market volatility, and longevity. Take a couple in their early 60s. Their rate may be as low as 3.3%. For each dollar of income, they need about $30 in liquid assets. To fund $100,000 in annual retirement income, a $3 million investment portfolio is required. Suppose their house is paid off and worth $500,000, which they consider their rainy day fund. This couple’s number is $3.5 million.
Knowledge is Power
Whatever your number, it horrifies, it liberates, it educates. If you need $3.5 million to retire, what hope is there of ever meeting that goal? On the other hand, you now have an excuse to stop spoiling the children.
On the plus side, the estate tax exemption amount is now $10 million, indexed for inflation (half that if you don’t die by 2026). Knowing your number is less than that, you may stop worrying about estate taxes. Even if your number is greater, you still have permission to disregard estate taxes. Until you have more money than you need, estate taxes are your heirs’ problem, not yours.
Find Out Now
Young families should know their number. Imagine one spouse dies, leaving the other with small children. The survivor must continue working, but may have to cut back the hours to allow time for doctor’s appointments, piano lessons, homework, etc. How will the surviving spouse ever save enough for retirement? How much life insurance is needed? If you know your number, the way forward becomes clearer.
A lawyer is the wrong person to help calculate your own number. Instead, ask the help of a registered investment adviser or a certified financial planner. Your CPA can be a good resource, especially one designated a personal financial specialist. Does your preferred adviser have different credentials? FINRA can help decode them.
Request a Monte Carlo analysis. It’s a way to determine the odds that you will (or better yet, won’t) run out of money in retirement. An 85% chance of success is good enough for most people, but even that may require a horrifyingly large amount of savings, especially if your idea of success is to preserve your capital and live off your income alone.
When I was a young lawyer, more than one financial planner told me their compliance department prohibited such projections, fearing that to do so would imply a rate of return. Twenty years later, calculators are available online, for free, often sponsored by the same institutions that once forbid them. Google “Monte Carlo retirement calculator.” The online calculators are remarkable, but tend to be simplified for ease of use. Personally, I pay my own adviser each year for a more robust analysis that considers not only retirement income but also education savings, employment benefits, and healthcare costs.