New York Magazine: NOVEMBER 2005
Nailing Your New York Number
Here’s what it will take for you to stop working and never run out of money. A formula for the good life.
By Lee Eisenberg
How large a nest egg do you need to fund a secure, satisfied post-career life in New York and be confident that your assets will outlast your pulse? What is your New York Number? It’s an annoying question, fraught with the things you don’t want to think about: destitution, deterioration, death. It’s therefore a question that’s usually asked at night, almost always silently. How you frame the question depends on your age and temperament.
When you’re in your twenties, sliding from job to job, commuting from Philly because you can’t afford Hoboken, the question is easily dismissed: Old age? Chill. By your thirties, the question grows louder. Unless some miracle occurs—reclusive uncle bequeaths oil ranch—you’re staring at 30 more years of dragging your bones to the office, hoping the bottom doesn’t fall out of your 401(k). A voice inside wants to know: Fuck-you money—how much is enough? In your forties, you put it more decorously: What will it take to get off the goddamn treadmill? By now, the query has elbowed its way from the back of your cranium to the front. It’s time to get serious about—why is it so hard to spit out?—retirement.
At 50, the New York Number is not just messing with your head; it has set the demons dancing. What if housing prices crack and, with them, your fragile nest egg? Are your loved ones adequately protected? What if you wind up in some assisted-living asylum, with no one to wipe the drool? A lightbulb flickers. What you need is a good, solid financial plan that takes you all the way out to age 100. No, bad idea. Thorough planning takes time, and now you’re panicky. What you need is a worksheet, something that leads to an answer now. Be patient—there’s a quick-and-dirty formula at the end of this story. But before you grab a pencil, you need to think about some other things—qualitative, not quantitative. You need to think about what kind of Number chaser you really are. There are, after all, just four types:
(1) If you’re like most people, you’re a procrastinator. You know you need a comprehensive plan but don’t do anything about it. And it’s not just you: Surveys show that at least one out of three millionaires has nothing like a financial road map to his remaining decades. Why this sloth? Planning is arduous, a pain in the New York butt: You need a shoe box into which you stuff every scrap of evidence pertaining to your financial life, present and future: checking, savings, and retirement-fund statements; grotty little ATM slips; current accountings of your mortgage and credit-card debt; wills and insurance policies; any trusts that may apply; federal, state, and local tax returns, to list a few. The requisite papers are blowing like tumbleweed under your sleigh bed. Anyone got a stick with a nail at the end? Once they’re collected, you have to lug them to a financial planner whom you really don’t know or may not trust.
(2) But let’s say that procrastination isn’t your problem. It may be that you’re a natural-born plucker, one who simply plucks a New York Number out of thin air. “Hmm, $10 mill—that’s what it would take to tell ’em to shove it.” For pluckers, a good, solid New York Number is little more than a blind guess, a wild-assed stab.
(3) Or maybe you’re a plotter, a conscientious soul who stays up late harvesting and crunching data with the help of an online calculator. You study life expectancy (getting longer); projected rates of return (getting harder); projected health-care costs (getting surreal). Compulsively, you try to quantify everything, even your headaches, which are 24/7.
(4) If you’re none of the above, you’re a prober, a person who plumbs the depths of your psyche, sensing that the Number isn’t just about money. The future calls for simplification and enlightened downsizing, a retirement that’s small but beautiful. Yet a bothersome question hovers above your yoga mat: What if I get fed up ordering no-iron travel clothes from a catalogue? Besides, ashtanga doesn’t pay the rent.
There can be, of course, no single New York Number, not in a place where, shamefully and intractably, disparities of income and wealth are as great as anywhere in the U.S. One New Yorker’s retirement lifeline is another’s long weekend. The top fifth of Manhattan’s earners now make 52 times more than the lowest fifth—$365,826, compared with $7,047. The Bronx has a poverty rate of 30.6 percent, outranked only by three Texas border counties. In East Harlem, median income is $9,320 a year. Sixty blocks due south, it’s $188,697. So, for some, the New York Number is indeed fuck-you money: You can walk away while still a pup! For others, the New York Number is food, rent, and medicine money: How much do you need so you won’t starve, freeze, or suffer a long, lonely decline? In between these extremes, there are your friends and mine who, by every mean and median, are better off than most and whose retirement dreams vary widely. These are people on the cusp. Maybe they’ll have enough money, maybe not. Maybe they know what they’re looking for, maybe not. I’ve talked to a lot of people like this, and they sound like these three:
“My dream? A small farm on some land upstate. I’m worth about $500,000 now. My mother has a couple million bucks, but it’ll be split three ways. So—who knows?”
“We’re in our fifties. My husband is an officer in the Fire Department and will retire soon with a good pension and health insurance. He also has a job on the side, which pays $15,000 a year. He’ll probably open a repair shop.”
“Both of us have ten years to go. We try to save at least $7,000 a year. We’re not counting on Social Security. My father-in-law has a young second wife. We’re not counting on him, either.” I also chat with those who seem to have made it over the cusp, including a middle-aged couple on the West Side: Let’s call them Mr. and Mrs. Amsterdam. Their kids are out of the house. The Amsterdams are still working. After “retiring,” they say, they’ll seek out “occasional consulting.” You hear it all the time; sometimes you find such work, often you don’t. You can’t count on anything here. The Amsterdams live in a nice apartment—nothing luxe, but it comes with a narcoleptic doorman and its value has appreciated like crazy over the past twenty years. The Amsterdams also own a weekend place in the Poconos. They don’t spend much on clothes, drive a sensible car, and when they travel, they go three-star. Invested assets? About $1.5 million, not counting real-estate equity. If they sell one or the other of their properties and invest the proceeds, their Number will approach $2 million. Is the Number enough for them? Probably so, given their lifestyle. Assuming a conservative return, a couple million dollars should yield about $100,000 a year, not counting Social Security and perhaps a tiny trickle of pension money, so long as Mr. Amsterdam’s employer doesn’t implode and take the pension fund with it.
Leaving the Amsterdams, I meet up with a person whose Number isn’t boundless, but it’s way more than plenty. So let’s call this person Plenty. Plenty lives on the East Side, shops on Madison Avenue, weekends in the Caribbean, the whole bit. “What if something happens to you when you’re in your sixties or seventies and still have 20 or 30 years left to live?” I ask. “Say there’s a market crash. A dirty bomb outside Barneys. What would you be willing to give up?”
Precious apartment space?
“A bedroom, possibly.”
“I could cut down.”
Facials? Hot-stone massages? The pink sand at Harbour Island?
“I’d rather swallow a bottle of Ambien.”
I hop a crosstown bus—destination: the lower reaches of the New York Number Stratosphere. I have coffee with a man, a money manager—we’ll call him Deep Pockets—whose current net worth is, well, big. DP’s something of a financial anthropologist. Margaret Mead had Samoa, Deeps Pockets has Wall Street. “Down there, everyone picks a Number, then talks about walking away,” he says. “But almost nobody ever does.” When he started out, he set his own New York Number at $1 million—that’s what it would take for him to be able to flip his boss the finger. But by the time he was 35, the figure struck him as “amusing.” Now, closing in on 50, he views it as “a total joke.”
So how much is enough? It all depends on how you want to live, he says, reaching for a piece of paper. He declares that he isn’t going to talk about people on the low end. “If you’re just trying to scrape by,” he says, “the Number doesn’t apply. It’s obscene even to talk about it.” Nor is he going to discuss those on the highest end. It isn’t that New Yorkers with $100 million don’t think about how much is enough—it’s that they already have everything imaginable, which makes their financial anxieties uninteresting.
Deep Pockets draws four boxes, which a majority of New Yorkers, those living paycheck to paycheck (let alone without paychecks), would consider high end, but let’s move on. The first he labels COMFORTABLE: people who, like the Amsterdams, will scale back some when they retire, dine and travel modestly, yet still have a nice life. To live this way, Deep Pockets declares, your New York Number needs to be between $1 million and $2 million.
The next box he labels COMFORTABLE PLUS. Into this box go the Amsterdams with upgraded amenities: membership in a mid-priced country club, maybe they get to keep their small second home. The New York Number in this case, says Deep Pockets, is between $2 million and $5 million.
Now he draws a box marked KIND OF RICH. Here are New Yorkers—Plenty, for example—who like to put on the Ritz, stay at the Four Seasons, shuttle between a couple of expensive homes. Deep Pockets sets this New York Number at between $7 million and $10 million.
Finally, he sketches a box labeled RICH. Make it into this box, he says, and you can afford to spend weeks abroad, belong to a gated golf community, charter jets, find yourself at parties with Henry and Marie-Josee Kravis, even though, compared with them, you’re a pauper. Deep Pockets lives in this box, the New York Number being $20 million.
Deep Pockets crumples and tosses the paper. “Anything more than twenty,” he says, “is irrelevant.”
Now and then, not that often, I run into people for whom the New York Number carries little trepidation, and not just because they have a ton of money. I’m thinking of Marvin Tolkin. Not only have people like Marvin done the math, they understand that a financial plan is more than a glorified budget. It’s an idealized self-portrait.
Marvin and his wife, Carole, a gerontologist as it happens, live on Long Island, in Hewlett. They also keep an apartment in Murray Hill. It is here one morning that they set out a deli’s worth of smoked fish and bagels and graciously answer every impertinent question I hurl across the table. At 79, Marvin has found a second wind, nearly gale force. He is a poster mensch for how someone can build and manage a New York Number and, in so doing, enjoy a meaningful later life.
“If you’re just trying to scrape by, the number doesn’t apply. It’s obscene.”
The first lesson you can learn from Marvin is, life throws sudden financial punches—so it pays to learn how to sidestep. Marvin made a very good living in the rag trade, building out a company started by his father: Style Undies. The name still looms over Sixth Avenue—just look up at the building at 64 West 36th Street, and there you’ll see it—style undies—painted right on top. In the early years, the company’s mainstay product was an item called the Gertrude, a tiny slip made for toddlers. The Gertrude enabled the business to take giant baby steps. Then, in 1951, Marvin launched a product that set Style Undies on fire: a nylon horsehairlike slip so thick and sturdy it stood up on its own. Women bought them to poof up their bouffant dresses, newly imported from Paris and all the rage. “We were on the cover of Life!” Marvin says.
Marvin’s stories about the Gertrude and the stand-up slip may sound antiquated, but the moral to them is important. Even when business was great, Marvin didn’t get cocky, didn’t spend it before he had it nailed down. He knew that this year’s poufy dress was next year’s disaster waiting to happen. He realized that Style Undies, like any business, had to adapt to changing times. After all, a huge number of Gertrude wearers, baby boomers, were rapidly outgrowing their knickers. Style Undies gave way to a bras-and-panties brand Marvin named Jennifer Dale, after a niece. (“We were the first to design bras in prints!” he says, beaming.) By the seventies, Marvin’s new lines were providing him with a take-home of a half-million dollars a year. But there were clouds above the sign on West 36th. Department stores had figured out that they could make bigger margins by outsourcing their own lines and squeezing the Jennifer Dales out of existence. Marvin didn’t procrastinate. Instead, he put a plan in place, which he believes everyone should do by the time one hits 50. Twenty years before he intended to retire, Marvin started to gather twigs for his New York nest egg.
Marvin’s preparation underscores another lesson: A wise bird diversifies; an even wiser one diversifies creatively. Marvin pulls some notes out of his pocket that outline exactly how he went about planning for retirement. Compared with conventional financial advice, which urges you to assemble a well-balanced pie chart of stocks, bonds, home equity, and sufficient cash for three months of rainy days, Marvin’s list is quirky. It instructs that each of us could sweeten our pies if, in addition to deploying conventional investment formulas, we drew on our own experience and expertise. Most important, don’t get hung up on a big, fat brokerage balance; it can be volatile. Go after things that’ll provide a long-term income stream.
When he sold his share of Jennifer Dale, he took a chunk of available change and bought into a commercial building in Ozone Park, knowing that it would generate monthly income for decades to come. Today, that building is worth about $3 million, which isn’t the point. The point is the monthly rent checks that arrive in the mailbox. “That building is how we’re living, kiddo,” Marvin says, nodding to Carole. I ask what the building brings in.
“Two hundred and twenty thousand a year,” Marvin says without pause.
Marvin glances down at his notes. He says on his frequent buying trips to Europe, he always tried to bring home a piece by Fabergé—jewelry, crystal, flatware. Each cost a few thousand dollars. In time, he would resell them. Last year, Marvin says, he sold a jade ladle for $110,000, more than twenty times what he originally paid. He also invested a bit of money in a string of women’s clothing stores in Kalamazoo, Grand Rapids, and other points in Michigan. And then there was the stamp collection he’d built, planning to sell it off piecemeal, as an annuity. Neither scheme worked out. Okay, you lose some.
But not until he retired did Marvin learn the greatest lesson of all: It wasn’t money that would yield his greatest pleasures, it was figuring out how to be needed. Sure, he makes time for fun, indulging his good fortune, traveling with Carole to Europe, India, wherever the spirit moves. Mostly, though, he exercises his need to be needed. He’s a go-to man at the Council of Senior Centers and Services of New York City, the umbrella organization that coordinates efforts on behalf of 300,000 older New Yorkers. Marvin advises on financial and strategic issues. He’s a big brother to any grown-up in need of mentoring who wanders across his path. And through it all, Marvin is an irrepressible champion of why there is no better place to grow old than right here. When I interject that a lot of people mention college towns as a way to get by on a modest Number, Marvin nearly combusts. “College towns?” he says, eyebrows arched. “If you want culture and excitement, hell, this is the greatest college town on earth! And there are an infinite number of ways to be needed. Wealthy people? They can be very lonely. Poor people? Their needs are obvious!”
Now the punch line: Yes, Marvin and Carole can afford to be nice. Their New York Number sits at “$5 million plus,” Marvin says. What the plus is is irrelevant. Financially speaking, Marvin did well. But that’s just the half of it. The other half is that Marvin is now doing good.
And yet—everybody wants to know, How much do I need? Where is that formula? They want to pick up a magazine, riffle straight to the page that will reveal, precisely, the specific New York Number needed to gain release from a temple of financial doubt. Financial advisers are not amused by such impatience, warning that the New York Number is not something you can do while standing at a magazine rack, a cappuccino in one hand. They tell you that the New York Number is a ganglia of risks that need to weighed, assessed, factored in.
The risk of rising health-care costs: Some advisers contend that a healthy person who leaves his job at 55 should have about $260,000 set aside just for unforeseen medical expenses. To amass this much—this will sting just for a moment—you need to invest (sensibly) $5,260 a year, if you possess the foresight, discipline, and the means to start saving, beginning at age 35.
The risk of inflation: Thanks to years of low interest rates, we don’t think much about how rising inflation can fry, poach, and scramble a nest egg, all at the same time. The costs of milk, medicines, and Metamucil go up, while the buying power of your holdings goes down. A 3 percent annual inflation rate over 25 years—higher than we’re used to, not unreasonable to expect—means that you’ll need twice as much money to live on as you do today. Let’s not get into what happens at 5 percent.
The risk of investing: If you’re gun-shy with your investments, as people are when they grow older, and insist on keeping your New York Number in CDs, bonds, or under the mattress, a rise in the cost of living will erode your “supersafe” portfolio. If, on the other hand, you keep your New York Number mostly in the stock market, just pray that you retire (and expire) over the right 30-year span—i.e., when the bulls are running.
No quick-and-dirty formula can be refined enough to take into account variables such as the future of Social Security; the fate of the death tax; how much you think you should leave your kids, if anything; the impact of disasters, natural or man-made; not to mention the fact you might find yourself getting birthday greetings on national TV by an immortal Willard Scott. Want to live to be 100? Great. It’ll cost you.
So, you see, this stuff gets complicated—ergo, the quick-and-dirty formula. It’s based on the assumption that a 65-year-old can confidently withdraw 4 percent annually (taking into account inflation and taxes) from a reasonably well-diversified portfolio and not run out of money before he dies. Four percent isn’t a number plucked from the ether: It’s based on empirical research by an enterprising financial planner named Bill Bengen, who worked it out more than a decade ago. Bengen, a New Yorker now living outside of San Diego, analyzed seven decades of market behavior, which he broke down into 30-year chunks, the length of a typical retirement. He thus measured stretches when the markets were mostly up and stretches when they were down. No matter which way the market trended, Bengen concluded that a person of traditional retirement age could draw down an annual 4 percent from a hypothetical portfolio (60 percent stocks, 40 percent bonds, or thereabouts) and not worry about outliving the old nest egg. Today, the so-called 4 percent solution is all but universally accepted. You may expire clutching your last nickel or your kids may luck out and inherit a fortune, but whatever happens to the markets, if you stick with 4 percent, you won’t have to worry much about running out of money.
By applying the 4 percent solution, you can take an impulsive whack at how much you need by way of investments. If you think you need, say, $75,000 a year to live on, just multiply by 25 (one hundred divided by four) and you’ll find that your Number is $1,875,000. If you need a million dollars, then your Number is $25 million. So grab a pencil and fill in the blanks:
a) Total up your invested assets (again, we’re assuming they’re well diversified, e.g., a 60-40 stocks-to-bonds ratio): ______.
(b) Multiply (a) by .04, and you get an idea of how much annual investment income you might reasonably withdraw each year: ______.
Feeling dizzy? Leave it at that and go lie down. But it doesn’t take much more effort to refine matters. Steps (a) and (b) take into account only your investment portfolio. You have other stuff to throw into the planning pot. Home equity, for instance. The value of your home is just sitting there, for now. You can tap into it with a reverse mortgage, or by downsizing. There may also be an inheritance in the offing, Social Security checks (presumably), and other income streams you haven’t yet added in. All these can be annualized to create a more comprehensive yearly snapshot:
(c) Add in the annual value of any home equity (to do this, divide your current equity by the number of years you expect to live—if, say, you’re 60, have $400,000 in home equity, and expect to live to 100, the annual value of your real estate would be $10,000): ______.
(d) Add any income, annualized, from any expected inheritance (total inheritance divided by the number of years you expect to live): ______.
(e) Add the amount of Social Security you assume you’re entitled to per year (for help, visit ssa.gov): ______.
(f) Add any expected annual pension benefits: ______.
(g) Add any remaining annual income you expect from part-time work or other sources: ______.
(h) Total (b) through (g), and you arrive at how much you can safely spend each year to get through the rest of your New York life: ______.
But here’s the rub. The man who helped devise this worksheet is a respected Cambridge, Massachusetts, financial planner—he actually prefers to be called a “life planner”—named George Kinder, a most unlikely choice to provide a shortcut to anything. Kinder believes passionately that you should think beyond money (the way Marvin Tolkin does) before you build a financial plan that truly fits your need for money and satisfaction. To do this, Kinder says, resharpen your pencil, stare at line item (h), and focus on expenses. You need to multiply line item (h) by what I’ll call the Satisfaction Factor. Say you dream about a time when you could write your Great American Novel every morning and devote the rest of the day to volunteer work. This life, or some variation of it, will generally require less money than what you spend now: You won’t have commuting-to-work costs, you’ll need to buy fewer spiffy suits and dressy shoes, and you probably won’t have to shell out for things like maintaining a boat or mortgages you’ll have either paid off or gotten rid of by jettisoning what isn’t integral to the dream. What’s a reasonable Satisfaction Factor? Eighty percent of your current expenses? Seventy percent? Sixty percent?
The conclusion here should be obvious: An unexamined life may or may not be worth living—but it’s almost always more costly than an examined one, even in New York.
Or, to put it another way, the tool you most need to figure out what it will take isn’t a quick-and-dirty formula, it’s a mirror. No matter that you’re time-pressed or a spendthrift. You need to take a good long look at yourself—and not just at your reflection in a store window.