Why 2 Million Dollars Might Make You Unhappy

As we continue delving deeper and deeper into the financial picture of retirees and pre-retirees, the psychology behind how people think about retirement is really interesting.  A mentor of mine once told me that we should “retire” the word retirement as it doesn’t mean much anymore with the changing landscape of work, family, and the economy. In fact, there have been several studies that suggest the majority of individuals working today will probably continue working into retirement.

“What’s My Number” Mentality:

If you jump online and research retirement savings, or watch some of these financial planning infomercials on TV, you will be hammered over the head with a philosophy concentrated on “what’s my number” as it pertains to retiring in the future. Basically, what they are suggesting to you is that there is a specific amount of money you will need in the bank on the day you stop working to continue to provide you with the income you need to live out those Golden Years.

At SGL, we are convinced and believe that this type of planning is both flawed and old fashioned. I submit to you that if you plan out this specific “number” and actually hit it, you will stick yourself in a corner that could cause you some serious paranoia as you age through retirement. We believe that there needs to be a serious shift in mindset from the old fashioned “what’s my number” philosophy to the more important “what’s my paycheck” mentality.

Let’s put this into perspective. You truly work hard at your job and you begin to achieve some serious success. You are socking away the maximum in your 401k plan, take the company match, and maybe get some nice stock options for 20, maybe 30, years. Your money is, of course, invested wisely and you achieve a reasonable rate of return. Your financial advisor runs all of your projections and sets you a goal of $2,000,000. They tell you that, when you reach that number, as long as you use a certain withdrawal rate, you will never run out of money.

On the surface you might think, “This sounds great! What’s wrong with that analysis?” The truth is, they are missing a very important item that should absolutely be discussed—when you achieve this level of success, you are 100% guaranteed to spend down your assets—sending you on a psychological roller-coaster.

In the first few years you may experience a sense of euphoria—maybe even spend more money than you would in normal years because you want to check off some items on your bucket list. After you come back down from the clouds, you will start to withdraw money at the reasonable spend down rate, but this is where the problem lies.

When people work their whole lives building up a capital base (their “number”), it upsets them when they see their assets balance go down. Logically, they understand that this money was built up for this very purpose, but it becomes nearly impossible for them to just sit and watch it run down. This is why, often times, you will hear people say that the wealthier people in the world can also be the some of the cheapest. The reason: massive fear of this cherished money slipping from their hands.

The Retirement Lifestyle Shift:

So what do most retirees do when this phenomenon starts to sink in? You guessed it—they begin to downsize their lifestyle—to the point where their investment balances remain stable. In my mind, this is actually counter intuitive to what should be happening.

You worked your whole life to build up these assets so that you can enjoy everything in retirement and do the things you want to do. Instead, folks become frantic, thinking that every single month they are going to start running out of money. Who would have thought that the success of hitting that “number” could actually be devastating to your retirement down the road?

A New Mentality:

This is why those of you planning for retirement should start to understand that all of your discussions with your advisor, or maybe your spouse, should revolve around the notion of “what’s my paycheck” and forget all about “what’s my number.” In our years in this business, we have noticed that the happiest people we get a chance to meet with for the first time are teachers, government workers, and others who have the luxury of receiving a steady pension from their former employers. They don’t have to think as much about the market or the statements they receive in the mail each month.

To us, this means that as you plan for your retirement you should strongly consider how much of your assets you can earmark to give you real, pension like, paychecks for the rest of your life. There are many types of products that can solve this part of the equation, all being some sort of annuity. The good news is that you should be familiar with these types of products as you already own one—your Social Security (a paycheck that continues for life)! Annuities may work in your plan, and they may not. That is why it is important to work with your advisor to determine where they might fit in the framework of your entire financial picture.

One Final Question:

If I asked you, “If you had 3 million dollars in your accounts when you retire, do you think you would be happy?” I would venture to say that the majority of you would unequivocally say yes. However, I also submit to you that 10 years into retirement your emotions would take over and you might start agonizing about those account balances every day. Picture yourself living in a beautiful location where you always wanted to retire, but all the while you are missing out on all those things you promised yourself you would be doing in retirement because you’re glued to your iPad or TV worrying about what the markets are doing or watching your balances like a hawk.

Start to consider that notion of retirement being about a paycheck and not just about a lump sum. If you knew the check was in the mail every month, how much fun could you have? How many of those bucket list items would you be checking off? Isn’t it time you figured out what your paycheck should be in retirement?