Mark Van Mourick
It seems that we all have a number in mind, it may or may not be realistic, but we like to believe that if we get there, we would have secured our financial future and could retire without worry. For many this “number” seems to be forever out of reach. For some it is “a little bit more,” although they may have already achieved enough to retire comfortably.
In my 30 years of working with investors and retirees, I have perfected a formula that works for families looking to secure their financial future. It assumes that as you approach retirement, you are taking care of only you and a spouse – you have raised your children and parents are not a financial burden. If that’s true for you then the following formula would help you define a realistic target:
- If you have a mortgage free residence that’s suited to your lifestyle, and your spending and vacation expenses are at par with your neighbors…
- All that you will need is two to three times the value of your paid off home in a balanced and diversified portfolio.
In my experience this has worked well with homes valued at $200,000, $2,000,000 and even $20,000,000. Let me illustrate this with the example of a $2,000,000 paid for home. Since the annual cost for a debt free home is about two percent, the annual cost of occupying it would come to $40,000. This includes taxes, insurance, utilities and maintenance. This cost would go up if the home is situated in a place like Southern California where the average household spends about 8 to 12 percent of their home’s value every year in lifestyle and tax obligations. In that case you will be good to go if your annual income is around 10 to 15 percent of your home’s value.
Now here’s where your savings come in. Continuing with the above example, if you have a $4 – $6 million investment portfolio that earns 5 percent per year, you would have a gross income of $200,000 to $300,000. This would not only satisfy your spending requirements but may also leave you with something extra. Future inflation will not affect your housing expenses significantly and you will have a substantial principal balance to use as well.
Unfortunately, we have found that many people should think about lowering their retirement housing/lifestyle expectations and saving more. Such people can reach their ‘number’ in the following creative ways –
- Compress and amortize their mortgage over the years they have left to work to ensure that they have a paid for home by the time they retire.
- When accelerating mortgage pay down doesn’t work, they can consider right-sizing their home at retirement. This means moving to a less expensive home and adding sales proceeds from sale of the earlier home to reach two – three times savings/home value ratio.
- A good financial advisor would help make investment decisions that ensure steady returns for income.
This formula works as well for families that have passed this mark, but are still not sure about their financial future. At some point, your wealth accumulation may cross your desirable “number” and become more about your heirs and charities than your lifestyle. If you are fortunate enough to find yourself in such a position, I suggest you think about gifting the excess part soon. It does not make sense to die with your estate at its maximum value, considering the current estate taxes which are likely to rise in the future. You should have a good estate planning attorney to help you transfer future growth of your assets to your heirs and/or charities. You can even maintain some control, and it’s possible that you would continue receiving income. The real blessing would come from the pleasure of watching your gifts being put to use while you are still alive.
About the Author
Mark Van Mourick, president of Optivest, Inc., is a money manager and Registered Investment Advisor with nearly 35 years of professional experience. Optivest, Inc. is a full-service investment management firm that provides portfolio management, investment supervisory services, investment advice, tax or financial planning, tax reporting and compliance, business exit and estate planning. Van Mourick has grown the firm’s managed portfolios to 70 wealthy families through building strategic, diversified portfolios for his clients targeting less volatility, more stability and referrals. Prior to opening his own firm, he was one of the leading retail stockbrokers for Smith Barney/Orange County, Calif. He is a substantial investor himself; Van Mourick invests frequently with his clients in a wide variety of investments including stocks, real estate and venture capital. For more information, please visit www.optivestinc.com.