Financial Opinion and Insights

How Much is Enough?

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

There’s the magic question everyone wants answered.  Television commercials ask people, “Do you know your number?” and others show a young father meeting his `older self’ who reminds him that it’s time to start planning; but few do.

Not only do most Americans NOT have a plan of any kind – probably a reason most don’t have any savings to speak of, as well – but, those that are even mildly interested tend to get their advice from financial entertainment television and purchased sets of CDs, DVDs, books of `financial secrets’ others don’t want you to know, and whatever looks enticing on the magazine rack…. Just about anywhere they can get help, as long as it’s cheap, or free, and always entertaining.

Is it any wonder the level of financial illiteracy is so high in this country and that so many people are totally unprepared to face their financial futures?

There isn’t an easy answer to ‘how much is enough’, but many advisors – this includes yours truly – have often used the `cocktail party, golf course, off-the-cuff’ response that you need to identify your annual need and divide that by 0.04. 

For example, if you feel you’ll need $60,000 a year in retirement, your `number’ is probably, maybe, arguably, somewhere around (60,000/.04) $1,500,000 in financial assets.

Of course, there are some moving parts in that assumption, as you can tell from my list of qualifiers.  First is identifying what your annual income requirement actually will be! 

Then, of course, there’s the `time’ factor – when you will retire and what your age is/will be at that point!  What other income do you have or do you expect?  What tax bracket will you be in – it helps if you can divine the policies of the next five presidents and the next ten to twenty congresses, of course; it also helps with your inflation outlook.

The mathematical computations are too complex for the golf course, cocktail party, or other social gatherings, so we’ve come up with a way to look like we can simplify the un-simplifiable, if that’s even a word.

If you haven’t begun planning, I would suggest you contact a qualified financial planner (CFP, ChFC, etc.) and begin, regardless of your age.  If you have a plan that’s three years old, you are overdue for talking with your advisor. 

At the risk of sounding self-serving – I apparently have no shame whatsoever – your problem isn’t the cost of planning; it’s the cost of failing to plan.