Introduction

I was strolling along the Seine the other day looking excruciatingly Parisian in my “I HEART Paris” tank top and a jaunty Eiffel Tower beret.  As I was studying my map, rotating it and my body in an effort to locate the river, a woman picked something up off the sidewalk in front of me.  I don’t know how I missed seeing it myself.  It was a gold wedding band!  The woman clearly did not know I was a tourist, because she offered the ring to ME!  In my best French, I tried to explain that I was already married.  However, from all indications, I mistakenly asked her to marry me.  She immediately invited herself into my personal space and started asking me for money.  What could I do?  She did have a great asset allocation.  Almost all of her teeth were gold.  You know how I love precious metals!  We apparently set the date for August 21^st.  I haven’t told Mary Kay yet, because, after 24 years of marriage, I just know how she gets.  She’ll be all like, “You can’t marry her.  You’re already married to me.”  So I’ll have to finesse that part a bit delicately.  But, they don’t call me Chip Aplomb for nothing.

When I looked up “aplomb” to see what it meant (since I had just used it, I thought this was wise) it said “confidence, skill and poise especially in difficult or challenging circumstances.”  You may be surprised to learn that the dictionary did not illustrate this concept by showing a picture of me doing yoga.  Mary Kay has convinced me that yoga should be one of my new activities in Paris.  “It’ll be fun,” she said.  By this she meant, “It’ll be fun-ny for her and the Parisians in the class to watch me try to do it.”  You may have gathered from past issues that I’m somewhat gangly and maladroit with a propensity to do damage to myself.  As a result, I’ve learned to be cautious.  For example, I wear protective eyewear when I engage in high-risk activities — like eating with chopsticks.

I was wary of yoga.

My yoga instructor’s name is Rajeev.  He’s a handsome version of George Clooney only younger, and made of rubber.  He’s achieved an inner peace that makes houseplants look hyperactive.  I must’ve been more safety-conscious than the other yoga students, because I was the only one in my class wearing a helmet.  Whatever.  It was a beginners’ class.  Rajeev seemed to accept my chapeau calmly, but with him it’s sometimes hard to tell.  After he saw me strike my first yoga pose, Rajeev realized my helmet wasn’t just for fashion.  It was common sense.

Yoga requires a lot of flexibility.  With respect to flexibility, I’m the Dick Cheney of yoga.  I can pull a muscle straining to capitalize a “Q” on my keyboard.  Rajeev, in contrast, can touch his nose to his hip as easily as he can touch his hand to my wife’s thigh while helping her with a pose and speaking in his oh-so-perfect French making me want to give him an inner piece of my mind.  But, I held my tongue knowing that anything I said would probably make the situation even more complicated when I have to broach the topic of my “gold ring fiancée.”

We began.  Rajeev wanted us to do something called the “Downward Dog” which changed into a “Cobra.” Rajeev reminded us to breathe.  This has always been near the top of my to-do list, even prior to any formal yoga training.  Before I even had a chance to make a mental note to add “Experienced Breather” to my curriculum vitae, we moved quickly to “Grooming Cat” and then transcended into, I think, a “Large-Mouthed Bass.”  I was quickly lost and the only pose I performed with a modicum of precision was “Sweating Like The Pig.”  I definitely found these to be “difficult or challenging circumstances.”  However, a keen observer of the finer subtleties of yoga might not have chosen the words “confidence, skill and poise” to characterize my mastery of the discipline.  I looked more like a Ken doll being tortured by an invisible 3-year old masochist.  I didn’t even have the aplomb to look at my watch to see how much more of this I had left to endure, because doing so caused me shoulder pain.  Gingerly, I fought through the pain to glance at my watch, but all I saw were spots.  Upon regaining consciousness, I was struck with an idea. Quicker than you could say, “TEJASVINAVADITAMASTU ((Translated:  “May both of us together seize the carp of serenity freeing it to spawn eternally in the tackle boxes of our souls.”)),” I invented “improv yoga.”  It takes its roots from the ancient 60’s party game Twister only you just visualize the spots in your mind and move however you feel like it.

This worked out well for me and, eventually, we reached the last pose, appropriately named “The Final Corpse.”  I felt like I had been preparing for this pose all session and I took to it as naturally as a politician to pork.  Letting Mr. Gravity have his way with me, I achieved such “Final Corpse” perfection that French funeral directors began dropping off business cards at the front desk of the yoga studio.

Once he was convinced I could still fog a mirror, Rajeev sat me up and we finished by chanting in unison—“Ooohhhmmm.”  Continuing in the improv yoga tradition, for me this became “Ooohhhmmm-my God, we’re finally finished.”  Of course, everyone stared at me…AGAIN, but that was OK because I achieved my goal.  Specifically, Mary Kay left the yoga studio with ME.

I was slightly disoriented on the trudge home.  Delirious with fatigue, I remember thinking it must be “last call” for some wedding season, because I vaguely recall turning down several more plaintive proposals.  However, even the desperate brides-to-be backed off when they got near enough to see that I was drooling.  I lacked perkiness.

I knew we were very close to home when we walked past what I consider to be the funniest restaurant in Paris.  It’s about a block from our apartment.  The restaurant was here in 2005, the last time we lived in this apartment, and I could never figured out how it stayed in business.  It was open for both lunch and dinner, but I never saw any patrons.

This year, however, business is booming.  As far as I can tell, the only change they have made is to mount a bright, glaring neon sign in the window.  The sign blares (in English):

French Food

I regard this sign as an homage to the American tourist.  I love imagining the dialogue that precedes the patrons’ entrance into this restaurant:

Madge:      Look Verne!  Across the street!  That restaurant says it has French Food.  This must be the place Babs was telling me about.  She said to me, “Madge,” she said, “When you go to Paris you’ve got to try out this place that has French Food.”  And here we are!

Verne:       What if it’s like that other place where the guy could hardly speak English?

Madge:      Oh, Verne, don’t be such a stick-in-the-mud.  This is the real deal!  They couldn’t put French Food on the sign if they didn’t have French Food.

Verne:       Do I like French Food?

Madge:      If you don’t like it, we can go to McDonald’s again.  Plus, I think I read about it in the book.  I just didn’t think we’d find it.  C’mon.  Where’s your sense of adventure?

Verne:       What the H-E-Double Toothpicks.  When in Paris, do as the Parisites.  We better hurry, though, if we want to get a table for dinner.  It’s already almost 6:00.

Madge:      That’s the man I married.  Let’s see if we can get someone to hold our bags and take a picture of us in front of it.  Babs won’t believe we were here!  Stand right by the sign and tilt your beret like you’re French.

Unfortunately, I’m much more like Madge and Verne than I like to admit, especially when it comes to my sense of direction in unfamiliar parts of Paris.  All the buildings are seven stories tall with ornate wrought iron that adorns tall windows.  All the cafés have the same round tables and rattan chairs out front.

“This has to be where we turned.  Look!  There’s the boulangerie next to the brasserie that started with “Le”-something.  It was across the street from the store with the produce out front.  The Seine is this way.”

My confident steps turn quickly tentative at the next boulangerie/brasserie/produce corner.  I wonder, again, if I will reach the Seine before I hit the English Channel.

As I’ve discovered (all too often in France), the first step in figuring out how to get to where you want to go, is figuring out where you are.  In Paris (as in the world of retirement planning), that first step can be more difficult than it seems.  At those moments, it is with great joy that I stumble across one of the red-and-white billboard-sized Paris maps with a big, red dot labeled “Vous Etes Ici”  (“This Is Where You Are Lost”).  It’s as if I’ve wandered around a corner to be greeted by a neon sign blaring “French Food.”  I feel a peace settle over me as I stare at the map quietly chanting “Vous Etes Ici.”  I could stare at it all day long, but eventually my trance is broken by a woman who finds a gold wedding band practically right at my feet.  No longer lost, I am literally sweating aplomb because I have been graced by the enlightenment that my next step might be in the right direction.

VOUS ETES ICI

A Plumb Perspective Editorial

Last month, I wrote about Goofus and Gallant.  A generation apart, they faced very different investing environments and responded with very different investment strategies (or lack thereof).  This month, I want to provide some simple metrics that will enable you to assess where you are on the roadmap to a secure retirement.  Ultimately, that is the goal of the Plumb Performance Portfolio^©—to provide a roadmap that will guide subscribers to, and through, a secure retirement (while steering clear of major obstacles).

Frequently, in trying to help investors locate where they are on the road to a secure retirement, advisors have provided a complex Global Positioning System and a massive instruction manual.  Investors find that they are now lost both geographically and technologically.  What many investors really want is to stumble across a billboard map that says “Vous Etes Ici.”  This month, I’m going to try to generate that map and give you a simple way to put your big, red dot on it.  It’s not a Global Positioning System (it has a lot of simplifying assumptions).  It’s more like the nice local man sitting next to you at the neighborhood café.  He sketches out a map on a napkin and, then, points you in the right direction.  You will have an approximate understanding of where you’re located and where you’re headed (rather than a precise understanding that you don’t know how to work your high-tech Global Positioning System).  Here’s my “sketch on the napkin:”

I know what you’re saying:

“Pretty graph, Chip.  Clearly, the multi-colored rings of the upcoming Olympics have influenced your work.  It’s very kicky.  It’s reminiscent of the early work of…”

At that point, I interrupt you to explain that this “napkin sketch” is not my attempt at art; it’s my attempt at a map.  And, I’m going to try to explain how it was built and how to use it.  For a map to be useful, you first need to assess its verisimilitude.  Does it appear to be an accurate representation of the terrain?  If so, your next step is to figure out your position on the map.

My Map/Napkin Sketch

This map is designed to show you where you are on the road to retirement and where your trajectory will take you.  For subscribers who are already retired, this editorial may not be particularly germane, but perhaps you will find it worthy to pass along to others who are not yet retired.  By the end of this editorial, I hope that you’ll be able to put your big, red dot on the map, see where you are, see where you are going, and track your progress on the journey.  This map is a guide to show you how much you need to save before you can comfortably retire at a given age, but does it have verisimilitude?

To find the coordinates of your big, red dot, the first thing we need to do is determine how much money you are going to need in retirement.  Every situation is different, but let’s make some sweeping assumptions to try to figure out at least what neighborhood (arrondissement) you’re in.  Let’s start with some assumptions that I think are applicable to many subscribers.

Assumptions About Expenses

First, we’ll zero in on your expenses.  You receive income and you do something with it.   Let’s allocate your distribution of this income into four buckets.  I have chosen to divide your income distribution into these specific buckets for reasons that I’ll explain in more detail below:

• Taxes: Federal, State, Local, Social Security, Medicare, but not including property tax.  That goes into a different bucket.
• Mortgage Payments:  Principal and interest payments on your principal residence.
• Retirement Savings:  This is how much you put away in a given year towards your retirement net of how much, if any, you withdrew from your retirement savings.
• Expenses:  Including money devoted to current or future tuition, property taxes, rent, all second home expenses and the cost of day-to-day living.

Taxes:  I’m going to make the broad-brush assumption that during the course of your retirement, the money you receive from Social Security will be enough to cover your taxes (excluding property taxes).  For some people, this will be an overestimation; for others, it will be an underestimation.  On average, however, I think it’s a reasonable assumption.

Mortgage:  I’m going to assume that you’re going to pay off your mortgage before you retire.  This was always a goal in previous generations and I think it’s a good one.  With your house paid for, you should have your housing expense covered for the rest of your life.  You will initially be able to live in your house “rent-free.”  Once you sell your home, the proceeds should be enough to cover your rent for the rest of your life.  The need to add money to this bucket will disappear if you’ve paid off your mortgage.  I would, however, caution against counting on the proceeds from your home to cover more than your future housing expenses.

Retirement Savings:  Clearly, once you’re retired, you’ll no longer be saving for retirement.  The need to add money to this bucket will disappear once you’re retired.

Expenses:  That leaves us with an estimate of the expenses (in today’s dollars) that your future portfolio will need to fund in retirement (assuming you don’t receive a pension or inheritance).  Some of these expenses will go away (like saving for or paying for children’s education), but others will increase (like health care).  People often think they are going to be able to live on less in retirement, but they can’t seem to live on less now.  On balance, I think this is a fair estimate.

Based on this set of assumptions, it should be straightforward to estimate your annual retirement expenses (in today’s dollars):

• Look at how much you made last year (or use a multi-year average).
• Subtract the amount you paid in taxes (excluding property taxes).
• Subtract the amount you paid in mortgage payments (principal and interest).
• Subtract the net amount you paid into retirement savings.
• The remainder is what you spent.  This is your annual retirement expense estimate (in today’s dollars).
• For example:
  • Assume a couple makes $100,000 per year.
  • They pay taxes of $20,000 per year.
  • They have mortgage payments of $15,000 per year.
  • They save $15,000 per year for retirement.
  • Their retirement expense estimate is $50,000 per year (in today’s dollars).

Assumptions About the Future

Ideally, by the time you retire, you would want to have a portfolio large enough to reliably fund this expense stream for the rest of your life.  The size of this required future portfolio will depend on:

• CPI Inflation:  I have assumed 3%.
• Rate of Return:  I have assumed you will earn a return on your portfolio of 6% per year (3% above the assumed growth rate of the CPI).  This is actually a somewhat aggressive assumption relative to my personal expectations, but it is less than most people are currently assuming.  It assumes a reasonably conservative asset allocation, but even in retirement it assumes that the portfolio still contains risky assets.  The key is to have these risky assets diversified to reduce the overall risk of the portfolio.
• Safe Withdrawal Rate:  I have assumed you can safely withdraw 4-5% from your portfolio each year during your retirement without outliving your money.  This is in line with studies done by a number of experts on sustainable safe withdrawal rates.
• Retirement Age:  The larger your retirement portfolio is relative to your expected retirement expenses, the earlier you can retire.

These are the key ingredients I used to produce the “Vous Etes Ici” map.

Your Coordinates

To determine where you are on the map:

• Figure out how much you have saved for retirement. Do not include your house, because we are assuming that your house will cover your shelter expense for the rest of your life ((I do, however, think it’s reasonable to include the equity in a second home, provided you have also included the expenses in the earlier calculation.)).  For example, let’s assume the couple with the $50,000 per year retirement expense estimate has $600,000 in retirement savings (not counting their house).
• Divide your current retirement savings by the expense figure you calculated earlier.  This is your Savings/Expense Ratio.  The Savings/Expense Ratio for the couple in our example is 12 (= $600/000 / $50,000).
• The Savings/Expense Ratio is the vertical axis on the map.  It is your latitude.
• Follow this across the map until you are above your current age.  This is your longitude.

Vous Etes Ici

Put a big, red dot there—YOU ARE HERE!

The colored, sloping lines on the graph represent the age at which you are currently on a path to retire.  If you are on the steepest line, you are on a path to retire at age 50.  If you are on the least sloping line, you are on a path to retire at age 85.

Hopefully, you’re able to locate yourself somewhere on this map.  For example, if our couple (with the Savings/Expense Ratio of 12) is 50 years old, they’re here, on a path to retire at age 63:

Now that you know where you’re positioned on the map, the next question is:

“Is this where I want to be and am I on the right road?”

If not, tune in next month when we’ll explore some ways subscribers can improve their positioning and trajectory on the map.