Fortune: July 12, 2004

It haunts you. You hate talking about it. You hate thinking about it. But if you don’t get a grip on it, you can kiss your retirement goodbye. It’s... The Number

By Lee Eisenberg

Here's a social experiment I urge you to avoid if you harbor even the faintest hope of making new friends at parents’ weekend. The social experiment has to do with research I’m doing for a book. The book is called The Number. It’s about how much money is enough. It’s about how many acorns you need to have squirreled away if you are to feel confident about living out your remaining decades in comfort and financial security. Oh, that.

The experiment is straightforward. There are three questions, posed to new acquaintances and old friends, nearly all of whom consider the queries off-putting. My test subjects are wellheeled men and women more or less at the midpoint of their lives. They are baby-boomers known to the financial services trade as HNWIs, or high-net-worth individuals. Admission standards for this club vary. Marketers grant HNWI status to those with net worths over $1 million, or to those with $500,000 in investable assets, or occasionally to anyone with a six-figure income. Meet one of these criteria and money managers consider you a big fish. But are you a happy fish?

Early results of my experiment suggest HNWIs have one thing in common: They’re worried. Squinting at their financial future, they need more than reading glasses to clear the haze. If they’re still working, they’re counting down what’s left of their careers and recalculating retirement funds. If they’ve already left their jobs, they’re fretting about whether they bailed too soon. Each day, it seems, brings a body blow to their holdings. A left jab to their stocks, a right punch to their bonds.

For all their affluence, HNWIs are a tender lot. Before launching my three questions, I try to corner the HNWI in a place or social circumstance with no escape. A dinner with assigned seating or a crowded bar make for effective holding areas.

Once a test subject is suitably contained, I introduce question number No. 1: “So. Tell me, how much money do you have in the bank? Just your liquid invested assets, please. Home equity doesn’t count.”

If the respondent doesn’t scowl or flash a Christofle butter knife, I advance to the second question. “Do you think you have enough to get you through, say, the next 30 or 40 years? That is—and this is important—in the style to which you’re presently accustomed.”

Finally, unless the respondent has by now fled to an undisclosed location, I conclude the probe with a flurry of queries. “Now, assuming you don’t think you have enough stashed away, what specific sacrifices are you prepared to make? Are you resigned to bequeathing your kids little more than the family bichon? Are you prepared to forgo asilky new car every three to four years, golf memberships, a Garland stove for that dream cabin on your own Golden Pond? Are willing to buy your clothes, every stitch, at J.C. Penney? Are you ready to substitute some no-name swill for Tanqueray Ten?”

My questions usually elicit less than a torrent of data. After a few months of shooting inquisitorial darts, I can report that most people, rather than succumb to investigation of their Number, would prefer to conduct guided tours through their medicine cabinets; or provide detailed accounts of confidential sessions with their life coaches; or describe in detail which frisky acts they’d be willing to perform—in Macy’s window—with this or that man or woman, and with what leather accouterment.

When I bring up the Number with a powerful New York City literary agent, a no-nonsense negotiator, she begins to fiddle with the pencils on her desk.

A prominent media executive, whose job is to keep up with what’s important in the world of politics and business, says emphatically that it’s his Number that he goes to bed thinking about at night, and it’s his Number that jumps to mind when the alarm goes off.

An influential PR man in Chicago, adept at thinking actions through to their consequences, tells me he has decided to go back to work exactly three weeks after announcing his retirement to his clients.

Over drinks in Manhattan, I open the subject with a couple I’ve known for years. They are among my closest pals. When he shows some inclination to divulge details of their holdings, she cuts him off with a brusque Don’t Go There. To my dear friend, I have morphed into a stranger. “Some things are not meant to be shared,” she says with bone-chilling finality. Y

et inside millions of us, whether we’re lucky enough to be a HNWI or just an OJ (Ordinary Joe), the Number looms silently large.

AARP reports that someone turns 50 every eight seconds, which means there are 12,000 Big 5-0 parties every day in America. The Census Bureau tells us that by 2040 that the population of Americans over 65 will double. The majority of these will look to Social Security as their main source of retirement income. That portends a major case of heartburn, not just for those who need the income but also for their children, my children, your children. And everybody’s children’s children. In a recent book, The Coming Generational Storm, economist Laurance J. Kotlikoff explains in dispiriting detail how Washington understates the future cost of providing Social Security benefits to the 77 million boomers who will be retired three decades from now. If the system isn’t fixed, in Kotlikoff’s opinion, we will expose future generations to “fiscal child abuse”: higher taxes, higher inflation, and a lower standard of living.

Nobody, it seems, is watching out for the future needs of Ordinary Joes. But once you get a few rungs up the economic ladder, you begin to get a little respect, both from Washington tax cutters and Wall Street, which wants a crack at cradling your nest egg. If your Number is $250,000 or more you are part of a sprawling, tasty group the financial giants refer to as “mass affluent.” This designation is the next best thing to carrying an HNWI card. There are billions at stake in the battle to gain custody of the IRAs, mutual fund deposits, and equity portfolios belonging to the affluent mass of professionals who will be faced with reorganizing their finances for retirement. If you are Fidelity Investments, Vanguard Funds, or their competitors, getting those accounts to roll over in your direction is critical. Those money managers who figure out how to market retirement services to the mass affluent will samba through the next couple of decades. Those who fail will creak at the knees.

From the mass affluent it’s but a few hard-won steps up to where we started. While near millionaires, or multimillionaires, are likely to win no sympathy from those below, they may sweat the future more than anyone else. After all, they’ve got more to lose, both in dollars and lifestyle. The clouds they see on the horizon are what the marketing team at Fidelity cites as the five key risks, any one of which canrain on a HNWI’s second-half dream: inflation, misallocated assets (i.e., not enough stocks, according to conventional wisdom), excess withdrawals, rising health-care costs, and, ironically and ultimately, the risk of living too damn long. One respondent, whose girth betrays his epicurean enthusiasms, told me his private financial plan calls for hedging the longevity risk. How? “Through the insatiable consumption of pork products.”

So ask yourself in the privacy of your home: Assuming you eat right and take your statins, what do you think your household will need to attain your own level of comfort through the next 40 years? A half-million dollars, appropriately divided between stocks and bonds? A million? Two million? Twenty? There is, of course, no single correct answer. Your Number depends on how you choose to live. One man’s Taurus SE is another’s BMW 745Li. (For more on calculating your number, see SIDEBAR TK.)

Whatever your Number, it is likely enough to lead you around by your nose. The Number may keep you clinging stubbornly to a job, or it might induce you to uproot your family in hopes of a big, lateinning rally. The Number could well cause you to make dumb investment decisions. (For detailed instructions, see David Denby’s American Sucker, an object lesson in number-envy gone haywire.) Maybe the Number keeps you awake at night. Or causes stomach acid. Or drives you to kick the cat. And that’s on days when the market is up.

How did everyone get so numb and numbered? And why weren’t we worrying about our second-half fate ten years ago, or back when we picked our college majors? What better time to have laid a foundation for adequate “lifetime income” (a common buzz term these days) now that boomers are exiting their “accumulation phase.” The easy answer is that baby-boomers have long taken it on faith they would live better than their parents. So from the moment they registered their first credit cards they—no news here—spent big and saved little.

During the late great boom, experts opined that the savings decline had to do with the wealth effect triggered by the ever-rising stock market. They advanced the notion that the mere illusion of riches burned a bigger hole in people’s pockets. That theory has proved shortsighted. During the 2000–03 market slump the wealth effect evaporated and yet consumer spending and personal debt levels marched merrily uphill. Thanks to low interest rates, Americans took on 50% more mortgage debt over these past three years, a hefty portion of which came in the form adjustable-rate products that will eventually ratchet upward.

Anyone for a trip to Tarzhay?

The Awful Truth

Fishing for true confessions, I snare a big one and proceed with the usual questions. The man I’m talking to is on his way to U-HNWI status (the u as in “ultra”), a term applied to those whose invested assets are pushing $20 million or more. He made his pile on the retail side of the investment business. I ask what the Number means to him.

“Well, to most on Wall Street, it means two things,” he says. “One short term, one long. Short-term, the number refers to the year-end bonus you get, which of course is far more important to your family’s well-being than base salary, which is crappy. Long term, though, the Number stands for something else.”

Here he pauses. I know what’s coming next. “Long term, the Number means Fuck You Money,” he says with a jutted jaw. “It was how much you need to walk away on your terms never look back.” Note that he doesn’t say it is how much a person needs to take time off to write the play that’s always been in him or to finance a children’s health clinic in Haiti.

The more evidence I try to gather about the Number, the more I marvel at a paradox: Personal exchanges are rare. Yet public discussion is everywhere. Behold the boundless supply of magazines, books, and websites offering investment advice. We are besotted with quizzes, checklists, and online calculators. These are all intended to help us paste a brightgolden sunset onto our long-term American dreams. Here’s a true-life, real-time example that happened just this morning:

I stopped writing this piece and did the Tony Soprano shuffle down the driveway to retrieve the mail. There I found an unsolicited mailer from a major financial services company on how to plan and protect my future. True to the formula, the piece starts out benignly then ratchets up the fear:

Page 1, headline: THE COST OF RETIREMENT. Beneath it a chart shows that in 1900 the average life expectancy was 47.3. In 2001, it was 77.2.

Page 2, pie chart: “Sources of Retirement Income (For Average Retirees Age 65 and Older).” Here, again, we learn that for most people, more than a third of their retirement income will have to come from Social Security. (Or as Professor Kotlikoff would bellow, “What Social Security?”)

Page 3, a photo of a fictitious investor. He’s in his early 30s, cast to look young enough to be able to accumulate sufficient assets to reach his Number 30 years hence. He presses a forefinger to his temple, a signal of thoughtful contemplation. “What can I do?”says the caption alongside his hard-working cerebrum.

Page 4, a little box entitled “Social Security Outlook.” It says, “Many analysts worry that Social Security’s role in retirement income will continue to decline …” (This is here in case we missed the semiotics of the index finger on the prior page.)

Thus does the Number reverberate throughout innumerable marketing campaigns for everything from annuities to Zocor. But rather than talk about it, most of us respond to Number funk in a timehonored way. We work the mall. We bury our worries about the long term under shopping bags full of short-term goodies. Grossly indulgent purchases seem soothingly affordable when we consider that the giant-screen plasma TV is the equivalent of barely a month’s rent at a nursing home. Most of us can’t or won’t imagine a nursing home in our future. Yet one recent study projected that about one of every two Americans now turning 65 will spend some time in such a place, with half of us serving at least a six-month sentence. The annual cost (in today’s prices) is between $33,000 to $91,000 a year.

My ongoing social experiment has revealed multiple instances of how we fail to connect the obvious dots between how we live today and the needs of tomorrow. Ask yourself, for example, how much the perks of your job enhance your day-to-day lifestyle. What will happen to how you eat, drink, and travel when the paychecks stop coming?

This question comes up frequently in conversations with financial planners. Two I’ve spoken to are quick to raise the specter of Lifestyle Relapse when they sit down with clients to discuss impending retirement plans. Tim Christen is CEO of Virchow Krause, a financial services firm in Madison, Wis. Over Cobb salads at his hushed, downtown luncheon club, the affable Christen explains that executives don’t fully appreciate how expense-account livingThe 45-year-old Christen is a case in point. He’s always on the move in pursuit of mergers for his expanding firm. His daily calendar calls for lots of reimbursable meals and travel, including trips to seminars and forums around the country, some at choice venues such as the Ritz-Carlton in Naples, Fla. Christen really likes staying at the Ritz and is grateful to be a full-time resident of Expense-Account City. “You know, I can’t remember the last time I entertained anyone personally,” he says. “Just about every check I pick up is a true business expense.”

But there’s always tomorrow. The day will come when it will be Christen’s dime that will stake him to the Ritz—or drive him to the Days Inn, depending on his Number and how he chooses to draw it down.

Not long after my meeting with Christen, I call on an investment adviser in Chicago.

We chat 57 stories up in his sunlit office with breathtaking views of the city’s incomparable skyline. Brien O’Brien is chairman of Advisory Research Inc., a management firm with more thaan $3 billion under its wing, including the investment portfolios of major foundations, corporations, and extremely wealthy individuals. On the question of helping clients create investment plans to avoid post-career Lifestyle Relapse, O’Brien cites an example of the person who sells a business, then seeks a portfolio designed to yield the same living standard enjoyed while the gent was still in the saddle. The investment portfolio needs to replace the owner’s salary as well as many perfectly legal expenses that have been charged off to the firm—a chunk of travel and entertainment and certain tax prep and financial planning fees, for example. O’Brien does a quick calculation on this question. “Think of it this way. Say a person has $50,000 worth of business-covered expenses every year, which is conservative for many business owners. And say that after he sells his business he wants to lives his life exactly as before. Which is only reasonable. Well, using very conservative investment assumptions, he’ll need to add a million dollars of liquid assets to his Number just to generate the $50,000 needed to keep his lifestyle at the level it was. Think of it, $1 million just to stay even.”

So ask yourself: When it comes to living out the second half, are your dreams bigger than your wallet? What will it take to buy that rambling house with a hammock, a shady porch, and trout breaking the surface in the midst of a snowfall of mayflies? Will you survive the five key risks and wind up with grandchildren nestled on your lap by a fire, in a room that smells of cedar rafters and cinnamon sticks?

Until the market did its backflip four years ago, affluent boomers could at least dream such American dreams, whether they had enough money at that point or not. For one thing, there was always the prospectof an inheritance to bail them out. But parents now routinely live to be 80, 90, or beyond. Estates once seen as backup college funds or perhaps a ticket out of a dead-end career are being drawn down to pay for nursing care, physical therapy, and assisted living. Indeed, for boomers the skies are gray all the way to the horizon. It was just five years ago that we were amused by books such as David Brooks’s Bobos in Paradise, which depicted a generation facing daily challenges no greater than finding the right cabinet pulls at Restoration Hardware. Today we dive for comfort under our fraying Frette Hotel Collection sheets. Global terror, pre-emptive war, a lousy job market, a jumpy stock market, soaring health-care costs, and an unlocked Social Security lock box are threatening the Paradise of the late 1990s.

Brooks and others had a winning way of describing how we wallow in good taste and design. But they offered few insights into the consequences. That’s what The Millionaire Next Door, and the cottage industry it spawned, was about. Published in 1996, Millionaire is dedicated to the proposition that any Tom, Dick, or Harry can reach a seven-figure Number if he only understands, duh, the simple math of cash flow. The road to riches, well, it’s pretty darn straight, say the authors. Just because Range Rovers and Rolexes are nice doesn’t mean they’re necessary. Most millionaires know that, which is why they’re millionaires. They sock away money through determined saving and because they’re content to live in split-levels sheathed in aluminum siding.

But how many HNWIs are willing to sink so low in deference to their second-half dreams? How many are prepared to sell the McMansion, load their home equity into the trunk of an old Volvo, then head straight downscale—if not all the way to austerity than at least to serious modesty? If there’s another universal truth in all this, it was properly framed by one chastened HNWI, age 52, who said, “Look it, you can’t get there from here. You can’t tell yourself you’re downsizing if all you do is move from a big million-dollar house into a smaller million-dollar house. And if that’s all your lifestyle will permit, then my advice is that you’d better keep working.”

Shuffleboard, Shmuffleboard

Yet baby-boomers are nothing if not adept at moving mountain, culture, and marketplace to suit their changing needs and whims.

So welcome to the Reasonably Affordable, Post- Career Lifestyle of Tomorrow. You’re 55, or 62, or 67. Your Number comes up short. Or for that matter, it comes up rosy. What do you do? Keep working, most likely.

Today there are millions who have postponed puttering in the sunshine, even if they can afford to leave the office behind. These are healthy, energetic people for whom unemployment would be dulling in the extreme. “Retirement as we knew it went out with the last century,” says Larry Cohen of SRI Consulting Business Intelligence. He refers to that time-honored stretch of vegification punctuated by occasional bursts of golf, paid for by ladders of CDs deposited at the local SunTrust. Cohen is one of many researchers who slice and dice that Life Passage Formerly Known as Retirement into distinct, multiple late-life stages. Once a career ends, more and more people will enter what Cohen refers to as Revolving Retirement, formerly known as semiretirement. It is further linguistic evidence of how we will sugar-coat the fact that we can’t afford to, nor even want to, retire to play golf till our heads are toasted as walnuts. Instead, Revolving Retirement will give us some time for golf but will also provide crucial supplemental income: a part-time job; a consulting gig; franchise ownership. Those post-career vocations will allow income to keep flowing, which in turn will give us a chance to run out our clocks before we run out of principal.

More profoundly, the Affordable Lifestyle of Tomorrow will also spark a revival in a dormant value or two.

Remember when Small was Beautiful? Get ready for its second coming.

The prophecy crystallized one afternoon following lunch with a New York marketing honcho. I’d just released him from his Number interrogation when he suddenly thought of a story he wanted to tell. It was about his uncle, a blue-collar worker from the Midwest, who diligently raised eight children on modest wages. The uncle was by no means the millionaire next door, nothing close to an HNWI. But that didn’t stop him from taking an inspired detour from the well-traveled road his friends and neighbors were on. He decided to retire not to a sunless apartment across town, nor to a patch of hardscrabble in a Florida trailer park. Instead, he bought a cozy oneroom schoolhouse on the coast of Ireland.

That man was a visionary. He figured out that contentment could be extracted from a salty breeze and a glorious setting. His little stone schoolhouse provided joy and romance that rendered expensive amenities—no Garland stove for him—entirely beside the point. So, prodigals, take heed. If your expectations outstretch your Number, it needn’t come down to how much stuff you can cram between four walls. It should come down to how much psychic satisfaction you can wring out of how little you wind up with. Or as that noted gerontological anthropologist Sheryl Crow put it, “It’s not having what you want. It’s wanting what you’ve got.”

Take a whack at a final puffball of a question: Are custom dental moldings and personalized golf carts really the keys to a long and happy rest-of-your-life?

And if they’re not, what is?

Lee Eisenberg is currently at work on a book called The Number, about the price of second-half dreams, to be published in fall 2005. Eisenberg’s quest for his own Number has taken him from the world of magazines, where he was editor-in-chief of Esquire, to, most recently, Lands’ End, where he was executive vice president and creative director.

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