Retirement Planning: Epictetus, Jimmy Buffett, and You
Jimmy Buffett has a very profitable career selling people like you and me a lyrical dream. Here you are, picking bins in a warehouse in Akron, Ohio. The old boombox you repurposed for your work radio starts pumping out that tropical beat while Jimmy yodels about smoking weed and swilling rum while laying in the sun on a white sand Caribbean beach. You hum along to the catchy tune while taking a 3-minute mental vacation. As the station transitions to a Bee Gees classic, you look back at your work, shrug your shoulders, and get picking. You have kids, a mortgage, and a car payment that all rely on this job. Back to work.
In my last column, I shared how our Jimmy Buffet dreams are used by financial advisors and insurance companies to pitch retirement services. Once you’ve picked your retirement dream, the next step is to figure out how to pay for it. Whether it’s a winery in France, a condo in Hawaii, or a yacht in the Mediterranean, you will need to run some calculations to see how you can pay for your dreams.
It’s fascinating when you consider the phenomenon of retirement planning didn’t even exist until mid-way through the 20th century. For the sweep of all human existence up until the end of World War II, retirement was the privilege of only a handful of the wealthiest members of any society. But even royalty struggled in their planning as retirement usually meant banishment at best or beheading at worst. It made planning difficult.
For millennia, employment for almost the entire population was confined to agricultural peasantry. Sure, there were some folks cranking out wagons, nails, and even stained glass, but most everyone clustered into family units to work the land. Everywhere. It was dangerous, back-breaking labor. You didn’t plan retirement. Retirement happened when you died or became too crippled to work in the fields. If you were very lucky, you had offspring willing to take you in – like Grandpa Joe in Charlie and the Chocolate Factory. If not, you were kicked to the curb – literally – where you had to beg for sustenance.
Now that our society has the luxury to contemplate retirement, we have these dream salespeople who will run a simple calculator on your behalf. The math is dead simple and should be easy for anyone with facility, using grammar school level calculations. First, they ask you how long you foresee needing to receive that income. They will want an answer in years of age. Hint: they are asking you to estimate the date of your death – for purely mathematical purposes, mind you.
You then decide what you will want to spend annually during retirement. The planner will smile and tell you to “think big” and “chase your dreams”. You come up with a number. The planner will then extrapolate a VERY LARGE NUMBER that you will need on the day you retire from your labors. They then do some more simple math to determine you need to currently be saving a monthly sum that exceeds your total monthly income by a couple orders of magnitude. That’s when reality strikes, and you realize you have to think small and forget about those dreams. Heck, you’ll be lucky to afford your healthcare insurance.
The advisors really earn their money, though, when analyzing all the minor nuances of tax policy and government regulations. When writing tax policy legislation, our representatives play around with numbers to benefit various constituencies and donors. They don’t care about you. This is why you can’t really get ahead of the game and why the advisors will always have a job. Tax rules change annually, and many times can have dramatic effect on how much of your money our betters think you should keep.
One of the rules of thumb for retirement planning is that most people will need at least 85% of their preretirement income. Advisors arrive at this percentage by subtracting from your working income your lunches at restaurants, the food truck, or the cafeteria. They also subtract those annual expenses for silk ties, business suits, and Redwing work boots. Toss in a few bucks for less fuel for your vehicles and your stop at the drive-through coffee shop.
The reason 85% seems high is that you still need to live somewhere and you’re likely to motor around in vehicles to which you have become accustomed. What turns this whole calculation on its head, however, is the element of debt in your personal financial journey. If you have been able to dramatically reduce or eliminate debt entirely, you need a lot less money flow.
Of course, the dream sellers have noticed this as well and have added suggested products such as reverse mortgages, insurance policy surrender, or my personal favorite, the JG Wentworth option for selling future income for a small percentage up-front now: the time value of money. Need a down payment for that new Camaro? Sell off your future to get it today! Trying to scare up more money after retirement is the new “thing” since you’ve already likely fallen way behind in the saving-up timeline.
If you want to know where you’ll end up financially in retirement, it’s really easy. Just tally up all you have and subtract your debts to determine your net worth. Then project all the extra money and property you intend to save up before the magic “retirement date” you picked. Then draw a line with a negative slope between that date and the date you predicted for your death. Then toss it in the trash. My advice is to work to pay off your debts as best you can as we all prepare for an uncertain future. The Greek philosopher Epictetus has some good advice that rings through the ages: wealth consists not in having great possessions, but in having few wants.