How much will you need?

Most discussions about retirement planning focus on how much you will need to accumulate in order to live in comfort. Make the maximum contribution to your 401(k) or other tax-advantaged account. Invest wisely. Don’t borrow too heavily. These are all good points to remember...and they’ll help any person in any situation avoid mistakes.

For the purposes of this book, though, we are going to suggest you plan for retirement in another way as if it’s a liability against (either real or potential) family wealth.

Don’t turn away. This doesn’t mean you’re going to have to live your last years as a hermit in a trailer without electricity or running water. It just means you need to think beyond your retirement to the ring or two outside of your circle. Of course, your retirement resources like any money are subject to some economic forces beyond your control. Prime among these: Inflation,which can wipe out thousands of retirement dollars every year.

A drop of even a few tenths of a percentage point in the inflation rate can mean another year-plus of solvency; conversely, a rise of a few tenths of a point can rob years from your reserves.

This is a well-known reality for families with money: Inflation impacts people living on investments more directly than people living on earned income (which reflects moves in the cost of living more immediately). Sure, you can invest your money more aggressively but aggressive investment means risk. Just ask all those people who were certain that
eToys, Pets.com and JDS Uniphase were going to buy them compounds in Kennebunkport or Newport
Beach. Invested money usually earns slow, steady returns. The steady part is great and has the advantage of compounding growth; but the slow part can get hammered by a slip of the Federal Reserve’s hand. One reliable average of investment returns (for everything from savings accounts to hedge funds) in the U.S. between 1940 and 2000 was 10.3 percent a year. That’s pretty good. It means that an average person could pull $30,900 a year out of $300,000 in invested retirement money. That’s almost enough for a couple to live on from the mid-range sale price of a house in a mid-range metropolitan area.

Inflation eats directly into the value of investment return, though. How much inflation should an aver age couple expect? One survey of economists published in 2001 expected the low inflation of the 1990s to continue through the 2000s at about 2.7 percent per year.


Net 2.7 percent out of the average 10.3 investment return and you’re bringing home an inflation-adjusted
$22,800 out of $300,000 in investment principal. That’s a 26 percent chop off of gross investment
income. If the average couple is going to keep its principal for heirs, it’s going to have cut one out of every four dollars from its budget. Welcome to life at the financial margins. And things get worse if hard economic times mean higher inflation. During the recession of the early 1980s, the U.S. saw steady inflation of more than 10 percent. What happens if inflation hits 12 percent? Then, on an inflation-adjusted basis, the average person losing $5,100 on his investments
has to dig into principal to pay bills.1 That has bad effects for years to come, even when times get better.
This is part of the reason why people with a lot of invested money even though they are rich and should feel secure act so conservatively about money. It’s a natural instinct in preserving principal and the earning power of the principal.

So, even though the number of North Americans with at least $1 million in investable assets grew 2.4 percent to 2.54 million in 2000, almost half of the Americans asked think that $1 million is not enough to retire comfortably.

More than half of people between the ages of 50 and 53 surveyed by the Amercian Association for Retired Persons (AARP) expect an inheritance of some sort to help smooth their retirement. This means that many Americans—already near retirement age are positioning themselves as net consumers of family money. This is a bad sign for their children and grandchildren. Which brings us back to the center circle. You need to think in terms of making your own retirement happen without drawing more from the family system than you’ve contributed.

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