We need to find many, not one, silver bullets to have people save for a life that is going to be closer to 100 years,” Joseph Coughlin, director of MIT’s AgeLab.
That came right out of the USA Today, on Aug. 1, Coughlin is a pretty smart guy. He was named by Wall Street Journal as one of “12 pioneers inventing the future of retirement…,” and by Fast Company as one of the “100 Most Creative People in Business.”
This is the man that is telling us we should be preparing to live to be 100.
This gives even greater meaning to the phrase: “It’s not how much you make, it’s how much you save.”
But the fact is, it’s hard to save a lot if you’re not making a lot. And it’s hard to make a lot if you’re not writing a lot of new business.
Why this subject and why now?
It won’t be long before we’ll be creeping up on the end of the year and that brings on the annual goal setting ritual in most agencies.
Goal setting can be remarkably different from agency to agency. Some leaders have producers set minimum goals that they are guaranteed to hit. Other agencies just assign a new business goal, ranging from $25,000 on the low side to $70,000 as an average. High performing firms average six figures or greater.
This all makes sense from a business perspective. Leaders need to have budgets. However from a personal perspective it couldn’t be worse.
If you’re projected to live to be 80, 90 or even 100 years old, how are you ever going to save enough money to provide financial security if you’re not killing it every year?
How much do you need to save to potentially have financial security?
The 4% Rule
The 4 percent rule was first proposed in 1994 as a “safe withdrawal rate” from a retirement portfolio. It works like this: Withdraw 4 percent of your portfolio in the first year of retirement, then increase the dollar amount that you withdraw each subsequent year to keep up with inflation.
If I’m killing you with numbers, let me try and make this real. If you retired today with $2 million in your account, you could safely withdraw $80,000 (4 percent) annually. Adjust that every year to deal with inflation and with a portfolio invested in 50 percent bonds and 50 percent stocks, they think it will work out for you. If you think having $2 million in your retirement account and you’re only 40 years old is enough, you could be screwed.
Here is what I did; I reverse engineered my goals.
I started with my retirement date and projected how much money I needed in my investment account. I started that 18 years ago when my oldest was six years old. By the way, I also had a four-year-old, two-year-old and a newborn at that point.
Once you know how much money you need, you can then determine how much you need to save and for how many years. My number was $65,000 after tax dollars for 25 years. Once you know how much you need to save you can then determine how much new business you have to write to get your book big enough to throw off that much extra income.
Any other goal setting process is foolish.
On occasion I’ll get asked, “when is enough, enough”? Obviously, I can’t answer that. It’s simple to me, if you have a $500,000 book, you’re making anywhere from $150,000 to $200,000 in most shops. When Uncle Sam gets through with you, you’re pocketing from $100,000 to $140,000.
Is that enough to pay your bills, take a vacation and still save $65,000 a year? In most cases the answer is no.
It’s important to cooperate with your agency principal in their goal setting ritual, but please don’t let it stop there. Even if you’re working with a financial planner, you might not be any better off.
One of the great things about being a producer is your unlimited ability to make money. So plan your goals, don’t wait for them to be assigned to you. You’re better than that.
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