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There are some experiences you have when growing up that stay with you forever. I grew up in South LA in a family where my mother was a Medical Certificates Examiner with the FAA, quite the unusual position for a female African-American, and my father owned an upholstery shop. Mom was paid by check, but Dad was often paid in cash. I learned that Dad would earn the cash because the wife of the husband who ordered the new or re-upholstered furniture didn’t want her husband to know how much money she spent. Some things never change. It was during the 1960’s that the neighborhood was changing from mostly Caucasian to African-American. But at the time, if you had a $100 bill everybody knew you were rich. In fact, I will always remember the clerks at the Ralph’s cash register would stare at my mother in complete disbelief because she was paying her bill with a Benjamin. My sister and I didn’t enjoy shopping but when we knew Mom had a C-note or more we made sure we were able to enjoy the shock and awe that was on full display at the check-out counter.
To hit the target you have to see it first
At 14, on my way to earning my Eagle Scout merit badge, I became the youngest camp counselor at Camp Big Horn at Lake Arrowhead Scout Camps. Eventually I ran the archery range. I can’t tell you how shocking it was to see older boys, but mostly adult Scoutmasters, and adult advisors who would begin practice by picking up the bow and arrow, look at the target, and close their eyes letting the arrow fly wherever the arrow flew. Counselors would scream, yell, get the troop involved with jumping up and down making noise, finally stopping the person with the bow and arrow telling them to open your eyes. Thanks to one highly experienced counselor we discovered the most effective way to get people to pay attention was to simply get behind them or to either side of them and whisper in their ears, “To see the target that you want to hit, please open your eyes”.
So, here I am right next to you whispering into your ears about some things that matter. Investors often feel smart when a position taken has risen in value. On the other hand, investors can feel stupid when accounts decline a lot in price. The truth is that the fluctuation in value may have little or nothing to do with intelligence. Too many investors throw money around like darts in the dark without determining how much money it takes for them to make work optional.
“If you don’t know where you are going, any road will get you there.” – Lewis Carroll
Just as $100 isn’t what it used to be, neither is $1 million. But the question that needs to asked, that only you can answer is, how much money do you need to retire the way you prefer to live? Let’s calmly open our eyes now and see the job that needs to be done. One thing is for certain, the work won’t get any easier. For years, investors were left to believe they would need $1 million in the bank to retire comfortably. If you have $1 million today and you set your withdrawal speed limit at 4%, in one year that works out to an income of $40,000. If it is the case that you need $80,000 a year on top of your Social Security that means under the same 4% rule you need to have $2 million today to work with. This is something to discuss with your children too. Chris Muller at moneyunder30.com suggests that millennials and Gen-Xers may need to set aside $2 million to retire “comfortably”. Muller calls the number “scary, but realistic”. He points out that we often fail to consider costs in retirement, rising costs of health care, and things like inflation, income taxes, investment risk and, the real wild card, longevity. Putting things in perspective, Muller says if you assume 3% inflation, millennials will need to set aside $2.1 million to match the purchasing power of $750,000 today. “That latte that costs $5 today may cost $14 by the time you retire.”
It pays to plan
Just as it pays to plan, it pays to prepare. For the good, the bad, and the unforeseen. Savita Subramanian, Bank of America Merrill Lynch head of US Equity & Quantitative Strategy on Bloomberg TV, May 10, 2016 warned of a “vortex of negative headlines” coming soon that could push the S&P 500 back near their February lows. She said, “We’re heading closer and closer to the most polarized election that we’ve seen in our careers. So there’s a lot to worry about. One of the things we’ve noticed is that about six months ahead of November in an election year, the market typically peaks and trends downward.” So, with your financial independence goal in plain sight, if the Fed is in a tightening mode during an unusual corporate profits recession, how will you be prepared?
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