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September 28, 2018

What’s Your Nest Egg Worth Anyway?

Seems like a pretty straight forward question. But, most of us don’t have the vaguest idea what our savings means for our life in retirement – that is, life without a paycheck!

In this era of information overload there’s plenty of over-complicated, over-simplified, and otherwise useless material available on personal finance, savings goals, investment strategies, diversification, risk tolerance, bull markets, bear markets, crashes, corrections, “lions and tigers and bears” oh no! What does any of that jargon really mean? Today we would like to hopefully clear up a little of this confusion.

If you’re between ages 55 and 62 and already have close to whatever you’re going to have, (say 85-90% of your savings ‘goal’) the question is a lot different than if you’re 42-50 years old and saving 10-15% of your income and have half to three quarters of your retirement goal.

Or, is it?

If you can’t picture your life the day after you stop getting a paycheck and start getting ‘play-checks’ from your savings, it’s a pretty good bet that all the planning, projections and analysis in the world is not going to prepare you emotionally and psychologically for that transition. Having partnered with hundreds of clients through this transition, we’ve seen human nature up close and personal crossing this threshold. It’s not always pretty, but the good news is there are ways to make sense of all this.

One of the exercises we’ve found to help couples gain clarity is to ask the individual most familiar with the checkbook, (the one paying household bills) “how much will your bank account need each month?”. For many, this seems too obvious to ask and too complicated to answer. But for this exercise, it’s really neither and the reaction can be incredibly telling.

Having some confidence and clarity on this answer is one of the best ways to avoid a lot of unnecessary anxiety and potential regrets. It’s never too obvious, but most people are actually better at discovering their number than they think.

Of course, the further out you are from your ‘career graduation’ the more daunting this may seem. But, again, people can still get a pretty valuable glimpse – if they start where they are. This is because the present situation is our most powerful perspective. Ask yourself what your checkbook needs now.

The next step is to imagine the life you’d be happy with on something less than your current income; using a real number. Keep dropping that number until you reach the place where you’re ok, but just getting by if you had to.

Next, double the first number and ask what living on that income looks like. Most people laugh gleefully and say they can see that—but they can’t really. It may not take long to fill that picture in but, it’s not right there for most of us.

Now we have a relevant range. And, that’s the most important part of the exercise. It’s the difference between a map and the landscape.

In our experience, this is best starting place no matter where you are on your financial journey. Starting anywhere else runs the high risk of developing a plan and strategy that may make sense to an advisor but has little meaning for you. That gap may not show up until it really matters. That’s either when the next market crash comes and/or when retirement begins to feel like it’s looming instead of blooming.

Starting where you are allows us to move the more technical, analytical and jargon jumbled aspects temporarily to the side and get to the real heart of the matter. We call this ‘Financial Life Planning’ and it works from the inside out.

Next month we will offer some other tips for wrapping your brain around what your nest egg’s really worth. Until then, have a great October!