Question: I always thought that if I could retire with $1 million I would be set. Now that I’m almost there, I can tell I’m not as secure as I thought I would be. In fact, I don’t know if I would feel much different if I had twice as much money. Could I have done something different?
Answer: The traditional approach to financial planning can be summarized in three words: bigger is better.
Have you seen those big bank commercials on TV in which each character is carrying around a large number? And everybody is carrying a different number. The punch line is (of course) “What’s your number?”
“Your number” is supposed to be the amount of money you’ll need to retire. The idea is that (a) you need ask the bank to figure out what your number is and (b) get the bank to help you take steps to get you to that number.
But this focus on a figure has a couple of big problems.
1. Problems along the way. What happens if a life event or a negative external circumstance impedes your progress towards your number? The list of life events or external circumstances is probably impossible to fully identify, but may include: financial market fluctuations, investor dysfunction, tax law changes, inflation, planned obsolescence, technology change, college education spending, law suits, overspending, misuse of debt, medical expenses, disability and premature death.
Even if you live the proverbial charmed life and none of the above items are enough to derail you from achieving your “number,” your challenges are far from over.
2. Problems at your destination. What if you do get to your number and have accumulated the amount of wealth you’d hoped for? As you are realizing, another truth begins to emerge: the problems you may have dodged during your working years are alive and well…and may be much larger…during your post-retirement years.
In retirement you are actually more vulnerable to financial market fluctuations, investor dysfunction, tax law changes, inflation, planned obsolescence, technology change, law suits, overspending, misuse of debt, medical expenses, long-term care costs and uncertainty over longevity.
I would suggest followers of this traditional financial planning approach need to reexamine their assumptions.
Is bigger really better?
A slight change might make for a huge difference: what if your goal is not simply “bigger is better,” but “bigger and better?”
Rather than aiming for bigger wealth, maybe we ought to shoot for better wealth.
That is to say, wealth…with benefits.
More on that next week.