Last Updated Nov 5, 2010 1:22 PM EDT
The retires, who are in their mid-70s, live modestly in Nova Scotia. When they won the jackpot on July 14th, they had just one question: What should they do with the money?
"We were quite happy with what we had and the way things were going," Allen Large, a retired welder, told Canadian Broadcasting Corp.
There wasn't anything they wanted to buy. So they decided to save $300,000 for a rainy day, and started writing checks to churches, fire departments, the Red Cross and hospitals where Violet was undergoing treatment for cancer. They reportedly gave away $10.6 million.
What makes their story a lesson is not just their generosity, which is inspiring in itself. It's that the Large's actually understand what flummoxes many retirees and pre-retirees. They know exactly how much they need to live on for the rest of their lives.
If you're retired and want the same sort of clarity, pull out a pencil and calculator. We're going to go through the step-by-step process of figuring out what you need. Then you'll have the ability to either buy things that you weren't sure you could afford or be as generous as this lovely Canadian couple with your excess cash.
Step One: Track your spending
Do you know how much you spend each month and each year? If so, jot it down. If not, pull out your check register and credit card bills and figure it out. Don't forget to include big irregular payments for things like property taxes, auto insurance and holiday gifts. When you come up with an annual figure, divide by 12, so you have neat monthly amount that covers everything.
Step Two: Subtract your annuity income
You're likely to get monthly income from two or three sources -- Social Security, a company pension or an immediate annuity. Add together these sources of monthly cash and subtract the result from the result in Step One, which represents the amount you spend each month.
Step Three: Consider the Gap
If the regular monthly income you receive meets or exceeds the amount you need to cover your expenses, your only concern is inflation. Jump to step four.
If your monthly income falls short of your monthly expenses, that's the amount you need to finance through savings. How do you determine whether you have enough in savings? Multiply the amount you have saved by 4% (that's the uber-safe withdrawal rate, according to market research), and divide the result by 12 to get the monthly income you can safely withdraw.
Does that cover your gap? If not, you're not in a position to be like the Large's. You're likely to need all of your savings to finance your lifestyle. And if this math tells you that you might not have enough, you may want to consider a reverse mortgage (assuming you have equity in your home) either now or later.
More than enough? Before you give away the excess, there's just one more step.
Step Four: Adjust for Inflation
Inflation has averaged 3% for the past 85 years, according to market researchers at Ibbotson Associates. But it's possible that some of your monthly expenses are not subject to inflation. if you have a fixed-rate mortgage, for example, 20% to 30% of your monthly expenses not likely to rise with inflation.
Still, just to be careful, it might be smart to estimate your personal inflation rate at 5%. That would account for the fact that certain expenses common to retirees, such as unreimbursed medical costs, are growing faster than the overall rate of inflation. And, while inflation has been tame for a long time, you don't want to take any chances.
To estimate how much you might need from your savings in the future, plug your savings "gap" (the result in Step Three) into BankRate.com's Simple Savings Calculator. Change the "monthly deposit" to zero; and the interest rate assumption to the inflation rate you want to estimate. Adjust the time frame to whatever you want to see--five years, 10 years, 15 (or do it multiple times so you can figure out how much you'll need at various points in retirement). The result will tell you how much your monthly gap might grow over time.
Step Five: Enjoy Your Wealth
Still good? Once you know that you have more than enough money to live on for the rest of your life, your job is to do one thing: Enjoy your wealth. If that means giving your money away, like Allen and Violet Large, start looking for the causes that you want to support. If that means taking your children and grandchildren on the vacation of their lives, book the trip. If it means helping your kids buy homes or send their kids to college, do it and do it now.
Too many people sit on their assets figuring that they'll leave their children a pile of cash when they die. That's a crying shame. With this approach, you never get to enjoy the family trip to Europe or the look on their faces when they realize that you've lifted an economic burden off their shoulders.
No you shouldn't spoil your grandchildren by buying every gismo that goes the market. But if you can use your money to make you and your family calm and comfortable, that's a wonderful use of wealth.
I'll leave you with one of my favorite Aesop's fables, called The Miser & His Gold.
The story, in brief: A wealthy miser used to hide his gold at the base of a tree in his garden. Every night, he'd dig up the bag and deposit more gold into the secret stockpile and marvel at his wealth. One night, a thief spotted the miser's nightly ritual. The miser went to sleep; the thief stole the gold.
The next day, when the miser realized what happened, he screamed and cried loud enough to attract the neighbors. Now that it was gone, he told the neighbors about how he had stored his lost wealth.
One wise woman asked: "Did you ever take any of the money out and spend it?"
"No," he said. "I just looked at it."
"Well, then, come again and look at the hole," she responded. "It will do you as much good."
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