Social Security and What’s in the Boat

Image of Author John J. Hohn and dog Jessie

Matthew Wirth describes what the financial side of retirement is like in Deadly Portfolio: A Killing in Hedge Funds. Matthew tells his wife,

“No more income . . . just social security for the rest of our lives. We need to live on what we’ve saved. Like pushing off from the dock. We’ll need to get by with what’s in the boat because our stores will not be replenished along the way.”

Giving up earned income is unnerving. Advisors can provide the numbers, but portfolios are attached to people and people are a lot harder to manage than money.

People struggling to make ends meet don’t have portfolios. People with portfolios worry little about their needs. They are in the want stage of life. They worry whether they will have the resources to do everything that they want to do. Therein lies the challenge.

If an investor hasn’t defined how much it will take to meet the financial needs of retirement, no amount will ever be enough.

Needs are boring. Who cares how much is being spent on groceries, gas, wine, utilities, insurance, maybe even golf. But everyone must begin with boring ol’ needs, the fixed costs, and know what these add up to every month. Why? For peace of mind. That’s why. It’s a surprisingly low figure.

Needs don’t inflate the retirement budget. Wants do. Trips to Europe, cruises, a new boat, whatever. Wants can be managed. Needs not so much; they are constant. But too often investors let their wants drive their decisions.

ING had an add on TV recently with actors walking around holding onto “Their Number.” What nonsense! Not one person in 100 knows what his or her number is. They never figured it out. They just want it to be a big as they can get it. Getting a total is simple.

Assume that an investor will retire with a social security income of $22,000 a year. Assume that the investor needs—not wants—another $30,000 a year to meet living expenses. Most experts will say that 6.00% in annual gains and income is optimal for a retirement portfolio—maybe even 5.00%.

What size portfolio is needed to produce gains and income (total return) of $30,000? Easy. Divide $30,000 by 5.00%. Answer: $600,000. If the moneys not there, perhaps some wants wandered into the need column. Double-check it.

The number is surprising to some and disheartening to others. But it is where everyone must begin. There is much more to be discussed. The American stock market averages about 8.00% annually. It has its ups and downs. But that’s another subject and grist for a later blog.