I often hear it said that somebody “Has it made.” I take it
to mean that the person can just coast to the finish line, like when the Chiefs
are ahead 38 to 7 with two minutes to go. They have it made. But when do we
have it made?
Many of us want to know if or when we have it made, when is
the outcome secure? When we get to the fourth quarter of life, we should be
looking at the scoreboard and the clock. Sure, we need to play the whole game.
Heading for the showers in the fourth quarter is not the way to go, but when
can we relax a little bit, knowing that it will end well?
Since this is a column about money, let’s skip the obvious
issues of health and relationships. We know that we can never start taking
people, especially our loved ones for granted. We also must be diligent about
taking care of our bodies. One of the basic truths about automobiles is that
the older they are, the more maintenance is needed. Once a car stops
depreciating, the operating costs start going up. The same is true with the
human body. The older we get, the more frequent the doctors visits and the more
we need to eat well and exercise consistently.
But back to money. There are some straight ahead formulas
that will answer this question with some degree of accuracy. First, we need to
know how much money we spend each month. We should know this but, if not, add
up everything we spent last year and divide by twelve. We need to know how much
guaranteed income we have or will have. I am talking about Social Security and
pensions. It is extremely unlikely that Social Security will change in the next
few decades, but if we are expecting a pension, is it secure like a military or
government pension, or is it subject to our employer remaining viable? Subtract
the Social Security and pension from our monthly expenses. If there is money
left over, congratulations! We have it made.
For many of us there will be a shortfall. That brings up the
next set of numbers we need to know. How much investable money do we have, how
much can we expect to earn on our investments, and most importantly, how long
do we plan to live? From there it is just a matter of doing the math.
Here is an example: assume that my certain monthly expenses
are $4,000 and Social Security is $2,000. I will need to make up the other
$2,000 somewhere. Next, I need to know how many months I will need the money.
The average age of my family members when they graduated to heaven is 92. I am
72, which means I will likely live twenty more years or 240 months. 240 months
times $2,000 is $480,000. If I have a half million dollars in the bank, I have
it made. But that doesn’t take into account return on investment. In the past
100 years or so, the S&P 500 has averaged 10% per year gain. Plugging those
numbers into a financial calculator or spreadsheet shows that to get $2,000 per
month for 240 months, earning a 10% return, I need $207,249 today. If I have
that in diversified investments in an IRA or 401(k), it will grow tax free and I
only pay tax on what I withdraw. That is very close to having it made. If we
want to invest in lower return but less volatile investments, we will need more
money. A calculator will give the exact amount.
The variables are that we don’t know if we will live exactly
240 months, whether we want to have any money left over for the relatives, and
if the 10% return is only a long-term average. There could be a multi -year
recession that knocks that down over the next few years. More importantly, will
monthly expenses change? Will we get our mortgage paid off during that time,
will we want to travel more, or will we have extra high medical bills? That is
where things like long-term-care insurance and good health insurance come in to
insure against surprises. No one’s future is certain, but we can create a
strategy for the long game and someone will likely say, “It looks to me like
you have it made!”
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