Your Number

Everyone wants to know, “What’s my Number?”

How much do you need to accumulate in order to retire securely, to cut your lifeline to the main source of your income? A couple of years ago, Lee Eisenberg wrote an excellent book called The Number. In it he asks you to think about the tough issues you have to wrestle with before you can even think about arriving at an answer. One of the main purposes of this column is to take the next step, to go beyond the broad issues raised in the book and to (gradually) give you the tools to arrive at your Number.

The first thing you have to realize is that the savings you need to accumulate—your Number—will really buy you two distinct things: the dollars to meet your standard of living, and security that there’s enough remaining to last your and your spouse’s lifetimes. For shorthand, let’s call them “Consumption” and “Confidence.” Every penny you add to the pot can buy you more Consumption or more Confidence, but not both. A glib financial planner might ask, “What would you rather do? Eat better or sleep better?” (Financial planners learn that question in Chapter 1 of the Junior Woodchuck Guide to Financial Planning.)

A quick diversion. There’s actually a third thing that goes hand in glove with Confidence, and that’s an inheritance for your children or favorite charities. The less you spend on Consumption and instead allocate to Confidence, the more you increase the likelihood and size of your kids’ inheritance. So to be more accurate, the dichotomy is not between Consumption and Confidence, but between Consumption and Confidence/Kids. I think most of us are struggling to earn a decent retirement, and are not particularly motivated to grow their kids’ inheritance. Nonetheless, that becomes an inevitable by-product of increasing your Confidence. Think of it as their unintentional inheritance.

What makes it so hard to come up with your Number is your need to figure out where you sit on the Consumption-Confidence matrix. It’s relatively easy to get a handle on Consumption. You sort of know how much you’re spending—the cost of your lifestyle. But Confidence is another dimension altogether. What does it mean to say you’re 50% confident? 75% confident? 99% confident? 100% confident? (No, forget 100% confident. There’s no such thing.)

And are you really so self-aware that you can focus on alternative hypothetical standards of living? I want to be 99+% sure of a $50,000/year standard of living; 75% confident of a $60,000/year standard of living; and 50% confident of a $70,000/year standard of living. If you’re a genius of self-awareness, you can come up with more and more ever-finer Consumption-Confidence goals. Each one will (eventually, with enough tools and work) translate into a savings goal. And then your target—your Number—is the largest of the goals you’ve been able to think of.

Can you spot the built-in fallacy in today’s post? For the answer, see tomorrow’s post.