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Will you have over $1 million ready for your retirement? If the answer is no, and this figure sounds totally out of reach, think again. A million dollars isn't what it used to be. The truth is that Baby Boomers, who have enjoyed more abundance and pleasures than any previous generation, need more than a million dollars for a comfortable retirement. And you can achieve this-even if you don't already have a net ...
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Will you have over $1 million ready for your retirement? If the answer is no, and this figure sounds totally out of reach, think again. A million dollars isn't what it used to be. The truth is that Baby Boomers, who have enjoyed more abundance and pleasures than any previous generation, need more than a million dollars for a comfortable retirement. And you can achieve this-even if you don't already have a net worth close to a million dollars-by starting now.
In A MILLION IS NOT ENOUGH, Michael Farr, one of America's leading financial strategists, shows you that this goal can absolutely be accomplished-no matter what your income bracket. Farr has decades of experience as an investment strategist advising thousands of clients. With this inside information he provides a step-by-step program that includes:
Why Boomers Are Reinventing How We Will Fund Our Golden Years
Jason Lee thought he had his life and his future figured out. He worked as a research assistant at the Library of Congress. He loved his work, pursued a passionate interest in World War I aviation history, spent his off days at the Air and Space Museum, and planned vacations to visit various collections of vintage aircraft, private and public, around the world. He had a lot of friends who shared his interest, but at age forty-five considered himself a confirmed bachelor. He didn't spend lavishly, but he indulged his hobby without restraint. Why not? he figured: He was going to support himself for the rest of his life. Love intervened. On a visit to the Old Rhinebeck Aerodrome in upstate New York, he met a woman whose father was a collector and piloted one of the vintage aircraft that flew in the show. Six months later, they were married.
Jason gave up his job at the Library of Congress, moved to Rhinebeck, and secured a job as a librarian at the local high school. His wife, Alicia, was a widow who had received a $100,000 insurance settlement on her first husband's passing five years earlier. She'd invested wisely but, since receiving the money, had only worked part time at the aerodrome's museum in the summer and doing freelance aircraft restoration consulting the rest of the time. Exclusive of returns on her investments, she'd earned an average of a little more than $24,000 per year for the previous five years. She was fairly frugal, traveled to and from her home on a bicycle most days, and kept a 1992 Toyota Corolla around for emergencies and winter days when she couldn't ride. Her husband had been a non-union carpenter, but had been good about putting a modest amount in his IRA plan for each of the fifteen years he was married to Alicia. In total, he'd put away $45,000. Alicia still owed $97,000 on the remaining eighteen years of the thirty-year fixed mortgage they'd taken. Of that original $100,000 nest egg, she had $48,000 in her investment portfolio and $16,000 in savings.
Since Jason had always figured that he'd only be supporting himself for his entire life, he hadn't been very good about contributing toward his retirement. He'd designated a modest 5 percent of his income to his 401(k) plan at the LOC, and when he left, he rolled over just shy of $30,000 into an IRA plan. He had no other savings, had rented an apartment in the Georgetown area, used mass transit exclusively, and, other than his extensive library and home computers, had few other assets. His starting salary at the high school was $32,000, and based on the terms of the current contract between the certified staff and the school district, the most he could hope to earn with his master's degree was $48,000.
Jason's father, Adam, was one of my clients, and once his son got married, he made sure that Jason and Alicia came to see me. I knew that Adam Lee had told all his kids that when they turned sixty, they would each receive an incremental gift (to avoid tax penalties) from each of their parents equal to the amount of money that they had in their various retirement accounts. The remainder of his parents' money would go toward various charitable organizations. Adam wanted his kids to learn some valuable lessons about saving, and though his plan may on some levels sound harsh, if his kids saved, they'd be amply rewarded. Jason had no problem with the arrangement his father had made; he simply had chosen not to take full advantage of it.
When I first met the newlyweds, I asked them what their financial and personal lifestyle goals were. They told me that they wanted to begin a family as soon as possible. Jason had attended the University of Virginia, paying out-of-state tuition, so he knew the high costs of a college education. They frankly admitted they were scared about the future and their retirement. Jason had never thought much about it because he figured he'd be okay living solo; Alicia and her first husband had only begun to think about it when he was diagnosed with cancer and their financial priorities radically shifted.
Alicia's parents were struggling with their own retirement issues and weren't likely to be able to leave much for their two children. Because of the arrangement the elder Lee had created, Jason and Alicia knew that they wouldn't starve, but Jason was determined to provide his kids with the kind of educational opportunities that his father had-along with ensuring that they would be debt-free upon graduation.
Fortunately, given the combination of Jason's father's future gift, their own modest savings, and a history of frugality, we were able to put together a plan that would make certain that the Lees' future children would have their educations paid for and the couple would be able to fund a secure retirement-even though they would be enrolling their children in college at an age when most of their Tail End Boomer peers were either within a few years of retirement or would have already retired. While the Lees' situation may differ in its particulars, it shares many similarities with those of others of their age group. And the lesson is clear: If you don't plan early, you can still plan smartly. I'll talk more about the particulars of their plan in later chapters.
The Boomer Generation, Defined
Today the largest generation to ever move toward retirement takes another step in that direction. In the time required to read this sentence, another Boomer turns fifty. That's right: Every seven seconds of every day, another Boomer reaches that milestone. Because our rate of progression into this age group is unprecedented, and because we Boomers possess unique personality traits and a conflicted relationship with our money, we face unique challenges and opportunities as we plan for our financial future. We're going to examine some of these complicating personal factors in the pages that follow. Before we do that, I need to make clear some points about how I use the term Baby Boomers.
Throughout this book, I'm going to use three ages to represent the broad spectrum of Boomers.
The first group I will use are those age fifty-five. Born in 1951, they represent the heart of that generation, and thus I call them Core Boomers.
The second group, those age forty-five, are what I call Tail End Boomers. Born in 1961, they are representatives of the last of the "official" Boomer generation.
Thirty-five-year-olds are what I will refer to as Neo-Boomers. Because they were born in 1971, they don't fit into the traditional definition of Baby Boomers-those born between the years 1944 and 1964. I include them because they are now at a transitional point in their lives when they have outgrown the Generation X label often placed on them and are in their prime earning years. Like it or not, they share many of the same traits as their Boomer parents-thus the name Neo-Boomers.
While all of these groups share common traits, the major difference in their retirement-planning scenarios is time. Though it is obvious, it needs to be stated: The more time you have before you retire, and the sooner you begin to put money away for that eventuality, the better off you are. Also note that the advice and recommendations covered in this book are applicable to the generations that follow the Boomers as well.
My, How Things Have Changed
Just to give you a better sense of time and where we were in the years that our representative Core Boomers, Tail End Boomers, and Neo-Boomers were born, here's a thumbnail sketch of what the economy looked like in those three years. Consider these bits of economic and historical trivia:
1951 This year represents the beginning of the Baby Boomer era. Along with that first vintage of Boomers, Americans also saw these events:
The first power-producing nuclear fission reactor goes online.
The Univac computer is introduced.
US pay phone rates rise from 5 to 10 cents.
Jackie Gleason makes $11 million for a two-year contract for The Honeymooners.
The US gross domestic product rises to $339.7 billion.
The median household income reaches $3,709.
The unemployment rate is 5.3 percent.
Per capita expenditures for housing reach $157.49.
1961 The last of the true Boomers are born. That same year:
Drs. Crick and Watson break the DNA genetic code.
IBM introduces the Selectric typewriter.
First National Bank of New York is the first financial institution to offer fixed-term certificates of deposit.
The US gross domestic product reaches $544.8 billion.
Median household income rises to $5,735.
The unemployment rate grows to 5.5 percent.
Per capita expenditures for housing reach $278.73.
1971 Twenty years after the first Boomers are born, some of that generation have already begun to reproduce and are now parents of the first group of Neo-Boomers.
President Nixon orders a ninety-day freeze on wages and prices.
First-class postal rates rise to 8 cents per ounce.
The US gross domestic product climbs to $1,125.4 billion.
Median household income increases to $9,028.
The unemployment rate is 4.9 percent.
Per capita expenditures for housing reach $494.56.
As you can see, the US economy was booming for much of this period, though many of us can remember the stagflation of the mid- to late 1970s. We all know that period was tough for many, but most Core Boomers and Tail End Boomers came out of it in fine fashion. For Neo-Boomers, that period isn't even really a deposit in their economic memory bank. Things have been so good for so long, most of us can't even begin to imagine what our lives would be like if we couldn't count on a continuing upward trend. I have to admit that the creeping sensation that this incredible run could end one day-whether due to economic factors outside our control or our own failure to save for our retirement-has more than a few of us tossing and turning at night.
The Costs and Benefits of Living
We live in a consumer culture, so in order to round out the picture of where we were and how much things have changed over time, a few select costs and salaries are shown in tables 1.1 through 1.7 to give you a sense of how the economy has evolved in the years since our Core Boomers were born. The culture has changed over the last fifty years, and our spending power has along with it. Even adjusted for inflation, many fixed costs such as housing, college tuition, a car-even admission to a baseball game-have increased at a faster rate than our salaries. In tables 1.1 through 1.7, the first figure is the actual dollar amount, and the second is its 2006 equivalent, adjusted for inflation.
Besides invoking a bit of nostalgic longing for the good old days, what does all this mean? We can see clearly that salaries have gone up, as well as prices. But are we really better off? On the average, yes, but by and large by only a slim margin. Unfortunately, the differential between the haves and the have-nots in American society is greater than at any time since before World War I. As we Boomers have come of age, so has our economy. And these changes in the financial landscape have altered the ways in which we need to save and invest to assure a safe retirement. In other words, our parents' retirement strategies (mostly born of a Depression-era save-it-all mentality) aren't enough to get us Boomers to the finish line with the money we need for the retirement we want. We have to do more.
Defining Our Mission
A million dollars is an ambitious goal, but the truth is that all of us have our own particular needs. I tell my clients to use the million-dollar benchmark as a guideline, but they'll need to refine that goal depending on a number of factors, including their lifestyle and the number of years they have left until retirement. One million dollars certainly sounds like a lot of money, but it clearly isn't what it used to be. As we've seen, price increases are constantly eating away at our buying power. In fact, inflation, as measured by the Consumer Price Index, has averaged 4.4 percent per year since 1975. We would have needed only $263,200 in 1975 to buy the same basket of goods that would cost us $1 million today. Therefore, our minimum goal of one million dollars by retirement is constantly increasing. If you expect to retire in thirty years, your goal will be much higher than if you're retiring in five years. The following formula gives an estimate of the goal in achieving the Million-Dollar Mission:
retirement goal = $1,000,000 x (1 + expected inflation rate) number of years until retirement
Using this formula, we can derive rough estimates of what it will take to achieve the Million-Dollar Mission for different age groups and inflation rates. Notice that the goal increases as both years to retirement and the inflation rate increase. This is because inflation is eating away at more and more of our purchasing power. If inflation were to continue at the historical average of 4.4 percent since 1975, we would need nearly $3 million to retire in twenty-five years!
In the chapter 7 case studies, I assume that the inflation rate will average 3 percent in the future. I believe that the Federal Reserve Board has become much more effective in staving off inflation in recent years. Hyperinflation such as that experienced in the late 1970s and early '80s should be a thing of the past. I encourage you to use this assumption as well. Table 1.8 illustrates the effect of these two forces and gives a rough guideline of what might be needed to maintain a $50,000-per-year retirement (by today's standards) as we move into the future.
Don't let this table scare you! If you'll be retiring in twenty-five years, you have plenty of time to get your financial house in order. If you are older and are retiring in just five years, you may not need to save nearly that much. The point is that time is on our side if we map out our goals and are willing to make some sacrifices. This has always been true, but recent developments in the economy have made it clear that the old retirement strategies Americans once employed are no longer going to work for this generation. With retirement visible on the horizon, Boomers are looking at a very different financial landscape.
What Is the New Economy?
Our parents spent the vast majority of their working lives in the prime post-World War II industrial era. For many, that meant working in the same field, possibly with the same company, throughout their careers, with employers contributing to their retirement through a traditional pension plan.
The Greatest Generation worked hard and built their fortune on global expansion and the national boom created by our existence-the Boomers. They started the Electronic, Atomic, and Space Ages-we took them to new heights. They benefited from the strength of our economy and the peak of the union movement to amass pension plans that most of us will never see. I don't mean to begrudge them their largesse-they worked extremely hard to build a world that made it possible for us Boomers to accomplish all we have. I am proud and grateful to stand on the shoulders of such a strong and accomplished group of people. Theirs was not a world of computer screens, gigabytes, and ergonomic workstations but of hammers and bulldozers and torrid steel mills. Many Boomers may have begun our careers in the waning years of that same era, but since the late 1990s the American economy has undergone a transition. Many economists call today's financial landscape the New Economy. Though not every financial expert agrees with this assessment, everyone can agree that retirement's different today than it was for our parents. Today's economic landscape is characterized by a few specific traits:
The absence or minimization of business cycles or inflations. Consistent growth without deep recessions reduces, but doesn't eliminate, the risks of investing. Individual stocks carry risk, of course, because of their strategies and markets, but overall market risk is reduced by a steady hand at the national and global economic wheel. Predictable and favorable tax and fiscal policies lead to more investment and a stronger economy.
The rise of new industry sectors, such as e-commerce, that produce computers and related goods and services. We have experienced a revolution in information technology. Not only do these industries employ vast armies of people, but think of how ubiquitous technology has become. Nearly every aspect of our lives has been transformed. Even a restaurant server needs to know how to use a computer to get orders into the kitchen. Kitchen appliances have chips that monitor performance and warn of impending service. They can even link to the factory for diagnostics and ordering of replacement parts.
An accelerated rate of productivity growth. Yes, we work longer hours than nearly any other First World country, but it goes beyond that. Technology and modern business practices have boosted productivity. There is a downside-workers are sometimes discarded as easily as a piece of equipment-but a vital economy and an ability to learn new fields make the workforce more fluid than ever.
The globalization of business as capitalism spreads around the world. More easily than ever, money flows around the world to fund the best ideas and businesses. Markets are freer than ever before, and US companies have benefited immensely by selling their goods in foreign markets.
Excerpted from A Million Is Not Enough by Michael K. Farr Gary Brozek Copyright © 2008 by Michael Farr. Excerpted by permission.
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