The Number Review: Figuring It

March 7th, 2008

This is the third installment of a 5 part review of Lee Eisenberg’s The Number. The first installment can be found here and the second installment here. The reviews appear every Friday afternoon.

In the last review, we talked about chasing the mythical number you need for a comfortable retirement. There are those who ignore it, those who worry about it but don’t do much about it, and those who plan for it, on a obsessive detail scale or a life goal scale. But how do we know how much is enough? Today we move on to Figuring It, which may give us some insight into the answer to that question.

This section emphasizes two things over and over again - that people are living longer than ever and that they are failing to plan adequately for this increased life expectancy. It is one thing to die without anything to pass on to your heirs - it is a whole other thing to die broke and in poverty. Eisenberg uses some fictional case studies that he calls Crash Test Dummies to illustrate these points, and the majority of the section revolves around using the Crash Test Dummies to show how retirement is more expensive than you think, and aging is expensive.

I’m not going to go into a long detailed explanation of the Crash Test Dummies, just a short overview - but I did find this a very entertaining and enlightening way to look at things. I love a good story, and I found myself getting a little attached to these fictional people, even when they did boneheaded things. I rooted for them to make good choices and figure things out. I guess, in hindsight, the best thing about the Crash Test Dummies is they made me realize what good choices were. They consisted of a 85 year old widowed woman who lived on her late husband’s pension and retirement investments, and their three children and spouses. Some of the children made smart choices, others made poor ones (let’s take $400,000 and retire at 60 and work part-time at consulting and go to the mountains with my new young girlfriend every weekend!), and all in all, I found the entire scenario an engaging and interesting read.

The section also talks about the history and background to the 4% rule - which is the idea that when you retire, you should only withdraw 4% of the principal of your assets every year to live on to make sure they will last you the rest of your life. I’d heard of the 4% rule before but I enjoyed learning some background behind it. This piece of advice and information actually did make me start thinking about real numbers - not that I’ve figured out my number yet (I’m starting to think we need more per year to live on in retirement just because of medical expenses than we needed before retirement, and that scares me) but the idea that I want assets equal to an amount I can withdraw 4% to live on per year is a concrete one I can wrap my head around. Not new information, but presented in a way that made it accessible to my thoughts.

The last part of the section discusses different types of financial planners - from fee-only to commission-only and everything in between (I learned that fee-only and fee-based are not the same thing) and then does an “under the hood” exploration of Fidelity as an example of how far retirement planning has evolved, including the evolution of the 401(K), and the movement from a planner doing the work for you to you doing things yourself. This part of the section leans a little more towards the higher-income bracket, in that, for example, there’s a sentence that says something like “If you only have $1 or $2 million in investable assets…” Okay then - we have much less than a tenth of that right now, but, we soldier on. Heh. The information is useful to anyone, and it is not only wealthy people that need to plan for retirement, obviously! But I do overall get the tone from the book that its target audience is really aimed at more upper-income people than I am, but I’m still learning from and enjoying the book as a whole.

So, by the end of this section, I’m honestly not a lot closer to figuring out what my retirement number is, but at the same time, I am more comfortable with thinking about it critically and facing the reality that we are nowhere near prepared to retire - ever. It also makes me want to call my parents and tell them they can come live with us when they retire if they need to, because I’m afraid they aren’t ready to retire ever either - and they’re less than a decade away from the magic age, unlike me. Time is not on my side as much as it was ten years ago, but time is still on my side. For now.

Next week I’ll review the final section of the book- Finding It - and maybe, just maybe, by the end I’ll have some sort of semblance of a number to shoot for. Just need to finish beating down the debt monster so we can start to get back on track. Finally. At least there’s a track to get on.