The Hen and the Egg: Asking a different question
By Seth Meisler, CFA, CPA/PFS
The other night, I was reading a book to my six-year-old daughter. On the very last page, two proverbs were printed in stand-alone fashion:
Better a hen tomorrow than an egg today. – Chinese proverb
Better an egg today than a hen tomorrow. – Turkish proverb
Now this seemed curious. How could there be two proverbs the exact opposite of one another? And what did those proverbs mean? If you eat the egg today, then presumably you won’t have the hen tomorrow. And a hen tomorrow means more eggs in the future. But what if tomorrow never comes? Or the hens catch bird flu? All that’s certain is today. Should I really forego that egg, given a precarious future? Which is better to have today—a hen or an egg?
Being a financial planner, of course my mind went straight to “nest egg.” In our industry, we think about this issue all the time. The central question is whether you spend and enjoy today or save for tomorrow. If you save too much, you limit your enjoyment of life, perhaps unnecessarily. If you spend too much, you may have too much life left at the end of your money.
In other words, in an ideal world, the goal is to have both the chicken and the egg. Assuming we want to maximize our happiness today as well as our happiness during retirement, the next question is the size of the nest egg. Having enough for retirement is going to become a national issue in the next 10-15 years, as individual savings are far below what is needed for retirement. According to the Center for Retirement Research at Boston College, “the median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement.”
So the question remains: how do we maximize our money so that we can enjoy it today and have enough for tomorrow? And how much do we need?
Numerous studies and books have been written on this subject. Published studies from both Fidelity and Morningstar present fairly similar conclusions: for the individual making $100,000 per year, by retirement the nest egg should be approximately seven times his or her salary, or roughly $700,000. While this is a helpful guide, keep in mind that the assumptions could be very different from reality. For example, individuals making less than $100,000 per year may not need as much in savings since their cash flow will be offset by additional Social Security. Affiance has a number of more sophisticated analytical tools to help determine whether you are on target to meet your goals, be they retirement, college, or other.
There are numerous factors that can determine the size of your nest egg, or how much you need in the future. Some of these factors are out of your control. The biggest variable, and the most frightening, is your date of death. Short of a terminal illness, it’s the unknown that haunts us. However, the performance of the stock market—scary in a different way—will also have a major impact on whether your decision to spend or save is the right one. There will always be some level of uncertainty and some number of things we can’t control. Also factoring into the equation is your legacy or other savings goal. One way to address this question is to decide on a certain amount to leave as a legacy to your family and/or to charity. This amount can be guaranteed via life insurance. The guarantee is backed by the claims-paying ability of the issuing insurance company. Once this has been determined, it will give you more freedom to spend or save the rest of your nest egg.
One the other hand, there are also certain factors over which you do have control and which will help determine the size of your nest egg. You can decide how long you wish to work and whether you will continue to work part-time in your retirement. You can control how much you save. Last but certainly not least, you can control how much you spend.
I realize I haven’t given my opinion about whether I would prefer the egg or the hen. In truth, that’s because I believe you don’t completely get to choose—there will always be some degree of balance. The important thing is to be as well-informed as possible so that you’re making the best decisions for your personal circumstances and your tolerance for risk. And if you decide to go for the hen, just hope it doesn’t turn out to be a rooster!