What's your (retirement) number?

Aug. 25, 2016
One of my favorite movies is The Intern, which stars Robert DeNiro as a 70-year-old retiree struggling to stay connected to the important things that make life meaningful: love, work, and relationships. 

Brian Hufford, CPA, CFP

One of my favorite movies is The Intern, which stars Robert DeNiro as a 70-year-old retiree struggling to stay connected to the important things that make life meaningful: love, work, and relationships. This movie, perhaps more than any other, drives a stake through the heart of the Industrial Age's vision of retirement as one filled with full-time leisure activities, primarily golf and travel.

The question that remains, however, is, "What role does money play at age 60 and beyond in supporting a meaningful life?" I applaud dentists who are working at 70, but only if it's because they want to, not because they have to work to support the basic needs of living.

A decade ago, financial institutions focused advertising on how important it was to know your retirement "number," specifically the amount of money needed in savings to support basic living requirements in retirement. The purpose of this advertising push was to entice individuals to work with a financial advisor to determine what their correct "number" was. These days, no one talks about a retirement number anymore. Perhaps this is because near-zero interest rates on bonds and certificates of deposit have changed the entire retirement income dynamic. The fact is that we are in a different environment today. Traditional retirement as a full-time leisure activity is no longer desirable, and an 8% return on retirement assets is no longer plausible. Still, this challenging environment is no excuse for dentists to avoid planning for retirement, even if they lack confidence in future outcomes.

Instead of forecasting some retirement number (perhaps yet another example of single-step financial planning) by guessing how long you'll live and agonizing over future investment returns on stocks and bonds, you can plan with a more elegant and scientific approach. This simple approach is to determine the amount of income you could receive today from an immediate annuity purchased from an insurance company and payable for life at your desired retirement age. For instance, from the website immediateannuities.com, I find that, for a married couple who are both aged 65, an immediate annuity will currently pay income at the rate of 5.48% per year for life for both individuals. As a simple example, if I needed $100,000 per year of retirement income for life starting at age 65, I could achieve that goal by purchasing an immediate annuity from an insurance company with approximately $1.8 million of my retirement savings.

This doesn't mean that I would purchase an immediate annuity for retirement; instead, this annuity income rate represents what the highly regulated and actuarially sound insurance industry states is a market-based retirement payment guarantee. The beauty of this approach is that it incorporates both expected mortality and current investment returns in the existing market environment. I don't need to guess how long I will live or what markets will do.

Why is this immediate-annuity approach such a big improvement over a retirement planning number? One of the shortcomings of the old retirement-number culture was that it was "probability based." By using expected future returns for stocks and bonds, inflation, and a Monte Carlo simulation, retirement planning clients might learn that they had, for instance, an 85% probability of a successful retirement.

While this probability-based approach is still considered a best practice among financial planners, both retirees and those saving for retirement want to plan with more certainty. With an immediate-annuity approach, if I have $2 million in savings at age 65 and need $100,000 in retirement income annually, I know that I could simply purchase an immediate annuity and provide income in excess of that need for life. I have maintained the luxury, in effect, of not having to purchase an annuity and can continue to spend at my planned income amount. It's only when my savings drop below a purchased annuity's guaranteed income payment that I must consider spending less, or perhaps purchasing that immediate annuity.

For you, and insofar as it applies to this arcane topic of retirement numbers, the real issue is whether you have a retirement goal that you believe in and whether you are saving enough to achieve that goal. I believe that the ideal metaphor for the perfect retirement is a bridge between full-time work and full-time leisure that incorporates both important aspects. My wish is that this bridge perfectly matches your need for meaning throughout your life.

Brian Hufford, CPA, CFP, is a wealth advisor and dental practice thought leader with Buckingham Advisors, a national, independent wealth and financial advisory firm with a specialty in helping dentists achieve their most important goals. To connect with Brian and Buckingham, visit BuckinghamAdvisor.com, call (800) 711-2027, or email [email protected].

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