Ahhhh, but a glimpse at how problem solving becomes just another part of the problem itself.
The question "how much should I save for retirement" isn’t, in and of itself, the problem. The problem stems more from the weird answers that come in response to it. Taking umbrage as I often do with the “media’s” take on financial questions, this weeks post deals with the answer to the age old, “how much” question, as written by David John Marotta, a Contributor at Forbes. (You can read his entire September 3rd post here.) Note that Mr. Marotta was able to get 5,493 views of this blog, which means that there are right now potentially 5,493 people out there that will get it ass-backwards.
Mr. Marotta notes that there are empirically five factors impacting a retirement projection:
- Your age and your spouses age
- Your target date for retirement
- Your asset allocation
- How much you’ve already saved
- How much you’re saving each year
Mr. Marotta fails to understand that we’re talking about a question who’s answer is first rooted in; “how much is it going to cost?”
Let me give you an example. Let’s forget retirement for a second and rephrase the question just to see if the method holds up; “how much should I save to buy my dream home?”
So let’s answer the questions and see where we get to:
- My partner and I are both 53
- We’d like to buy our house in ten years
- We’re currently 70% growth assets and 30% conservative assets and cash
- We’ve currently saved $5,000
- We’re saving an additional $3,000 each year
Can anyone tell me if we can buy our house yet?
Let’s add two alternative pieces of additional information;
- Option 1: the house we’d like to buy costs $250,000
- Option 2: the house we’d like to buy costs $25,000,000
Frankly, I don’t know about you, but before those last two pieces of information dropped in for a visit we were on track to buy our house, at least according to Mr. Marotta’s five critical pieces of information necessary to retire/buy a house/pay for college/put in a pool/or get out of the car to go into the grocery store to buy dog food. Except for one small little detail; what’s it going to cost. Minor? Not.
Now Mr. Marotta does admit in his article that you need a “guide” but he doesn't tell you what you'd need a guide for. All of the five critical questions noted by Mr. Marotta are the client’s domain. A guide can’t change your age, shouldn’t change your asset allocation without more information (such as what’s it going to cost and can you get there from here), can’t change what you’ve already saved and lacks the information to accurately offer advice on or adjust the amount you're currently saving.
Oh, just a second, that last one, what you’ve been saving? Let’s stop there for a moment if we can, I have a thought.
Upon receiving this information from a client, “we’re saving X amount of dollars each year, would not the next logical step be; “is that enough?” I mean, am I missing something here. Of course, the “enough” part is a direct reference to the “what’s it cost?” part, but I digress.
For the record, you can’t answer “is that enough” without knowing “what it costs.” As a matter of fact, you can’t weigh the value on either an absolute or relative basis to any of the questions numbered 1 through 5 without that answer.
You can save 15% of your salary or 25% or 13% or any other number you’d like to pull out of a hat. None of it will matter if it doesn’t accumulate enough money to “pay the bill.”
Let's check with another simple example:
Jack: I’m saving .50 cents a day each month to pay my cable bill in full each billing cycle
Jill: How much on average is your cable bill....
Jill: What percent of your earnings is .50 cents a day?
Me: Who cares! You won't have enough to pay your bill.
Is it me or do you see a problem with this train of thought?
Mr. Marotta’s reference to the Lewis and Clark expedition is a good one. Retirement is a journey. But, there's one small problem. What if you don’t want to find the Pacific Ocean? If your goal was to find Florida, then I’m sorry to say that tagging along with Lewis and Clark is hitching the wrong ride.
So, let’s review:
Item 1 should be “decide where you want to go”
Item 2 should be “what’s it going to cost”
Item 3 should be "can I get there?"
Item 3, "can I get there?"; if yes, good you can now consider Mr. Marotta’s five, if no; you can consider Mr. Marotta’s five even more carefully and adjust any item or items that you conclude need adjusting in order for the problem to have a reasoned chance at a successful arithmetical conclusion.
In his best-selling book; “The Seven Habits of Highly Effective People” Steven Covey may have coined it best as one of his Seven Habit:
Begin with the end in mind.
As much as we’d all like to reduce every “problem” down into some simple component part or parts; that’s just not always the right thing to do, nor is it always the correct thing to do.
Getting retirement right is about a simple equation; “what are my expected total costs for all items of expense, including taxes and uninsured medical costs, estimated to be during retirement and then, do I have/can I save/can I accumulate enough items of income (pension, Social Security, etc.) and assets (personal savings, personal investment, retirement plans at work, IRA, Roth IRA’s etc.) that combined, give me reason to believe that I’ll have enough money to pay for them?
You need to answer that question first and from it, trust me, the answers to Mr. Marotta's Items 1-5 not only take on greater importance and meaning, but they’re a hell of a lot easier to answer with real purpose and intent.