February 1 , 2007

DYING BROKE...AND INFLATION AND THE MIAMI DOLPHINS

I just read an article on Financial Planning with a bold, rather contrarian take on the retirement savings concerns of Americans. It focuses on what I refer to as the ‘What’s my number?’ neurosis that we all have (how much income will I need to maintain my desired lifestyle; how much do I have to accumulate to generate that income and to ensure my family’s future security; will I reach that goal at the rate my wealth is growing; do I need to spend less now….) The article’s writer poses the question of whether the numerous “retirement calculators” found on virtually all Financial web sites use assumptions and projections that are far too conservative. Or, to look at it another way, are financial giants such as Fidelity or Vanguard, for example, asking people to save too much in a self-serving kind of way? Rather than hyperventilating about inflation and outliving ones’ money, he suggests we ask instead,  “Are we saving too much for retirement??”

DYING RICH VS. DYING BROKE

At Frye Financial Center, with our comprehensive, long-term approach, we gain a unique perspective on this question. We are actively involved in all of the life cycle stages of   clients’ Financial planning, i.e.; the wealth/asset building years, the pre-retirement planning stage, sale of businesses, retirement/transition to salary free living, etc. In the process, we hear all of your concerns.

Based on our experience, the answer to the actual ‘numbers’ question is that it depends—it depends on your desired lifestyle and the financial assumptions we use with respect to inflation, interest rates and numerous other factors. The philosophical question boils down to, do you want to die rich and leave a lot of money to the next generations? Or, do you want to die broke, which may mean you and your spouse ‘living large’ during your lifetimes, and more or less exhausting your funds.

OUR CLIENTS HAVE VARYING VIEWS

We have clients who obsess over keeping their assets intact (or growing) during their retirement years and other clients who want to spend as much as they can and have no interest in leaving legacies. Those who want to leave legacies hope to enhance the lives of children and grandchildren with the ‘fruits of their labor’. Those who don’t desire to leave legacies, often believe that the ‘fruits of their labor will spoil in the stomachs of those that consume without their own labor.’

A BIG DIFFERENCE!

Of course there is a big difference in the accumulations required for one who plans to die rich versus one who desires to die broke. For example, leaving inflation out of the equation (I will get to that with the Miami Dolphins example), lets do some very basic calculations.

If one desires an income of $150,000 per year (this is just an example!), beginning at age 65 for life, with a full legacy to the next generation, and if the CD rate is 5%, $3,000,000 in invest-able assets is needed at age 65. In other words, $3,000,000 will yield $150,000 per year at 5%. At death the $3,000,000 is intact.

On the other hand, with just a $2,300,000 total investment, one can combine the 5% per year income with small withdrawals from principal to achieve the same $150,000 yearly income. This can be sustained for thirty years, to age 95, before completely depleting the funds.----That’s $700,000 less that would have to be saved to provide same lifestyle!

So what’s the right answer? Is it A? Is it B? Is it somewhere in between? That’s what makes this profession so interesting and challenging to me---you and your family situations are each unique and there is no one right answer.

INFLATION AND THE MIAMI DOLPHINS

What makes projecting and planning for the future so challenging is the high degree of variability involved. We don’t know how long you will live; we don’t know how much money you will ultimately earn, what your assets and businesses will be worth… and then there is the ‘mother of all’ variables---INFLATION.

Here is a good real-life example of inflation:

In 1987, when Joe Robbie Stadium opened I purchased Dolphin Club seating at $800 per seat. It seemed expensive then, but we had Dan Marino, Don Shula and Joe Robbie—it still seemed like a good value to me—I purchased a 10-year lease.

In, 1997, when my lease expired, the Dolphins set the new price for the next 10-year license at $1100 per seat/per year—a $300 increase. It seemed expensive to me, but I looked back at the prior 10 years with all the Marino /Shula excitement—it still seemed like a good value to me---I purchased another 10-year lease.

In 2007, with my lease expiring, the Dolphins have set the new price for the next 10 year license at $2800 per seat per year!---a $1700 increase over the last 10 years’ price (154 % increase.) It seems expensive to me, so I looked back again—Over the past 10 years Joe Robbie’s name has been unceremoniously removed from the Stadium—Don Shula and Dan Marino have both been retired (not on their own terms) -the Dolphins have missed the playoffs 5 straight years, and the entire organization seems to have fallen into a state of chaos---so I thought, huhhh???
                       

THE DOLPHIN INFLATION CHALLENGE

The Dolphins charging $2800 for the same product that cost $800 twenty years ago (I am being extremely generous in calling it the same product,) is a perfect example of the wrench that inflation throws into the retirement planning process. How can you project the right numbers required to maintain your desired lifestyle during retirement, knowing that retirement could very well last 30 years?

That’s where we come in. We will review the many financial scenarios and variables, taking into account your dreams and goals as well as the philosophical challenges.   Die rich? Die broke? Leave a charitable legacy?

Austin A. Frye, MBA, JD, CFP®

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