Retirement Weights and Measures

Yesterday’s post had some good stuff buried in it. (If I may be so immodest.) Its main thrust was to explore how much of your recent stock market losses you might be expected to make up with an additional year of work. But an important underlying predicate needs to be highlighted: Money is meaningless.

Whoa! Money is meaningless?

By that I don’t mean “the moon and the stars are for everyone,” or anything like that. Rather, I mean that a pile of bucks is simply too abstract for us. We can’t grasp its value. We need to find personal equivalencies—our own individual metric system of weights and measures—to translate a large savings bucket—or a large loss in a savings bucket—into what it means for us personally.

Take Ernie for instance, from yesterday’s post. He suffered a $430,000 loss in his $1,200,000 retirement savings bucket during the recent Unpleasantness in the financial markets. What does that mean? What are its equivalencies?

Money Equals Allowance. Ernie found that, for him, based on where he is in life (the cusp of retirement), $430,000 equals $17,000 of annual retirement spending; allowance if you will.

Money Equals Lifestyle. Ernie might take the next step and mentally tote up the adjustments in his lifestyle he would have to make to fill a $17,000 gap in his budget. Dinners out; vacations; how frequently he changes his razor blades; perhaps moving to a less expensive home. Whatever. (Me? I used to like to buy the books I read; now I use the library. Other adjustments as well.)

Money Equals Future Years. If Ernie were not on the cusp of his retirement, and was planning to work anyway, he could project how many years of average investment earnings it would take for his savings bucket to grow back to its pre-Unpleasantness value.

Money Equals Past Years. If he wanted to, Ernie could comb through his account statements and count how many years back he’d have to go before his savings buckets were as low as they’ve recently gotten. Knowing that might be important to Ernie. There’s a lesson in there somewhere.

Money Equals Expectations. It might be instructive for Ernie to go back over his past few years’ annual statements to see how his expectation for his future retirement fluctuated with the ups and downs of his savings buckets. Which year’s expectation was the most realistic? It’s human nature to focus on the very highest, thereby ratcheting up our expectation for the future. But then we are left bemoaning the inevitable drop in expectation. Was our highest expectation ever the most realistic? Likely not; but it’s the one we measure against.

Money Equals Work. Ernie projected that it would take about four more years of working, at a time he was ready to retire, to make up his $430,000 loss.

Money Equals Peace of Mind. Ernie feels more financially vulnerable than he did a year ago. I don’t know how to measure that. Perhaps he can count the number of additional pharmaceuticals he now takes to be able to sleep at night. Or perhaps his new-found fear of losses has caused him to adjust his asset allocation to one that’s less equity-oriented; one that trades off higher projected allowance for greater stability.

How do you translate your money into something you value?