By Brad Thomason, CPA
Jiu Jitsu is a Japanese martial art which is essentially a form of wrestling. Most cultures around the world developed their own styles of wrestling, and this particular one developed alongside Judo, and in response to the proposition of an unarmed peasant having to take on an armed samurai wearing armor. That’s the legend, anyway.
Obviously such a match-up would not be a very fair fight. But the result of trying to figure out how to deal with this problem was a surprisingly complex set of maneuvers which exploit bio mechanics (elbows only bend one way, for instance), off-balancing your opponent, and generally trying to use physics and forethought to create an advantage where normally you would have no hope at all of winning. It has become a huge international sport, and has wide appeal to people looking for physical activity that is both vigorous and has to be thought about pretty deeply, too. Many have referred to it as whole-body chess.
As you might imagine, if you are up against an experienced opponent, you can find yourself in some truly awful positions. A lot of the training comes down to learning what these positions are, how to do them to other people, and what to do about it if you find yourself on the receiving end.
A significant portion of the advice about how to deal with a bad position comes down to ‘don’t get yourself in that position in the first place.’ Which is about the most unhelpful advice in the world if you are in fact already there. Yet it happens to be good advice: prevention really does trump cure in a lot of those situations. If you watch the best guys on the mat for a while, you come to realize that what makes them so good is their ability to stay out of trouble to begin with.
Serious discussions about retirement usually take place among people who are at least fifty, and often older. The reasons are plain enough. Even if you know that retirement is out there in the future, the needs of a growing career and maybe a growing family too, are what soak up virtually all of the attention span when you are younger.
But as folks get closer to actually having to retire, they naturally start to think about it more. They get more interested in making sure to take the steps they need to take, and become more and more preoccupied with whether or not they have the bases covered.
It turns out that even if most of the heavy lifting gets done after fifty, what you do as a younger person sets the stage for how tough the job is when you are older. Below I’ve listed four things that a person can do to keep their future self from having to work too hard to get out of a bad spot:
1. Be capital efficient. Pay attention to when it is time to sell and reinvest. Make sure that interest checks and dividend payments don’t just lie around doing nothing. Turn them into investment capital; that’s what makes compounding happen, and as we all know, compounding is the heart of the secret sauce.
2. Be proactive about setting the stage for future income streams. That could be by way of a job with an old-fashioned pension plan, or getting some rental houses that the tenants can spend the next 15 years or so paying the debt down on, or even something in the farming or forestry realm like a stand of pine trees (a favorite here in Alabama) or something similar. Having ongoing income after you no longer receive a paycheck, even if it only covers a modest portion of your ultimate retirement withdrawal needs, can count for a lot more than you might think from a casual glance.
3. Have good outcomes when you risk capital in pursuit of a return. Admittedly, there’s luck involved with this one. Then again, the prudent tend to have better luck than the imprudent. If the market rewards you for your risk, and your own sense of caution keeps you from taking on goofy risks, the net effect will be that the you of tomorrow has more resources available to make everything work out.
4. Front load your savings. In order for you to benefit as much as possible from a long compounding period, you not only have to start early, you have to have enough capital for it to make a difference. The great thing about retirement savings is that both time and capital act as force multipliers. But you have to have some force to multiply in the first place. Saving a bigger portion of your earnings in the early years, so that your balances can reach significant sums while there’s still a lot of time left on the clock for compounding to work, is one of the most sure-fire retirement tactics out there.
As you get older the focus shifts from growing the size of your nest egg, to protecting what you already have. The shift to lower risk assets in most instances means that overall return levels are going to come down too, later in life.
When a person can do one or more of the things listed above when they are young, it puts the future self in a much better place to be able to accept these lower return levels that are common to the less risky asset classes.
Even if you no longer think of yourself as being all that young, there are probably still things which you can do today that will make tomorrow a little easier. This is especially true if you are still working, or could be working - even to some degree - if you wanted to be.
Fighting out of a bad position is something that some folks just have to do. It’s unfortunate, but it happens. That’s why it’s important to spend some time looking at how to not get all the way into the bad position in the first place. Even if it ends up happening to someone, maybe that someone doesn’t have to be you. Starting sooner is better when it comes to prevention. But even if things have already started to progress in the negative direction, there may still be things you can do to contain the damage and keep the situation from getting worse.
If you think about it, all of us make decisions everyday on behalf of the person we are going to become next week, next month, next year. Makes a lot of sense to help them – us – out, if possible. At the very least, we don’t want to make it harder for our future selves than it has to be. Either way, being aware that what we do in the present has impacts out into the future is the first step. But only the first step. Since it is beyond our power to keep the present from becoming the future anyway, ideally we should use the event to our advantage.
By Brad Thomason, CPA
The S&P 500 just closed up 28% for the year of 2019. Which is a big number, and an accurate number.
But is it a misleading number?
A big part of the reason that 2019 looks so good, is because 2018 finished the year basically at the bottom of a pretty sizeable dip. So the recovery of that dip boosted the results for 2019.
How much so? Well, let’s put it this way. While the 12-month result was 28%, the 15-month result was around 10.5%. Same stock market. Same impact on any holdings you had going into the Q4 2018 dip. Now, to be sure, 10.5% is still a healthy increase. But it certainly isn’t the same as the 12-month number.
The 24-month annualized average shows an even more tame picture, by the way: about 7%, compounded for both years.
Part of the problem with trying to interpret statistical information about outside events is that it is not always clear what the implications are for your portfolio. For instance, if you had two investors, one of whom was fully invested 24 months ago (a typical scenario for a retiree) versus someone who started their investing career on 1/1/2019, you would have vastly different results from the exact same market.
So part of the challenge of answering the question ‘how does this affect me?’ is tied to all of the particularities of your individual story.
External measurements mean different things for different people; and even different things depending on how many weeks or months you include in the measurement picture. That’s a lot of non-specificity, you know?
When looking for more solid ground, one approach is to focus more on internal measurements than the external ones.
You know how much your current investment balances are.
You know how you have your capital allocated among the various asset classes.
You know what percentage of your investments could be affected by a major downturn in a particular market or some other sort of loss.
You know more or less how much you are going to need to spend for planned items in a typical year.
These are the elements which form the backbone of both a current assessment, and the basis for future plans.
Moreover, there are important principles which don’t change at all, whether the market is going up, going down, or doing nothing at all. These include the understanding that when the retirement period starts, the job of the portfolio changes from growing, to providing a source for income withdrawals. Another one? The understanding that the risk level needs to come down as you age, and that the way that happens mechanically is by reallocating balances, or depleting higher risk pools of money ahead of lower risk pools (and in most real-world cases, likely some combination of the two).
When the stock market has a nice run, and you end up with more money than you had in the past, that’s a good thing. For sure, it is. Great to experience, and fun to talk about.
But don’t let that distract you from the more enduring aspects of what’s important. You won’t find them listed in the Wall Street Journal. Instead, you already have that information at your finger tips – or if you don’t you certainly know how to get to it. That’s the stuff you should be paying the most attention to as you plan, act, monitor and adjust your finances in the service of getting an eventual win in the retirement game.
By Brad Thomason, CPA
I love to cook. Have for a really long time. But I didn’t necessarily have the smoothest of starts. If you had known me back when I was a young man then you would have been impressed with the amount of destruction that I could visit upon a kitchen during the preparation of a meal.
To some extent I did it because I could. I spent a lot of time on the weekends at a farm house/hunting camp with all of my friends, and the rule was that if you cooked you didn’t have to clean. I loved cooking and hated cleaning, so this didn’t even register as a choice. But since that was my context, that was my assumption when I cooked elsewhere, too; whether for roommates at college or even back at Mom and Dad’s for holidays. I cooked, and others had to undo the damage.
But there was another aspect of my mess making, which is why I’m bringing all of this up. It was always very important to me to do a good job with the food. Better than good, actually. In those early days, when I was still learning to develop tastes and manage the process of getting everything ready at the same time, I stayed right on the edge of being overwhelmed. Every minute I was in the kitchen was a minute in which I felt things could rapidly spiral into total collapse. I’m not sure I would have described it like this at a time, but I was essentially making a declaration to my diners: you can have good food to eat or a small mess to clean, but you can’t have both. I didn’t have the skill level to deliver both at the same time. So I didn’t try. I made the choice for them, and settled on the food.
Sometimes we can’t accomplish everything we’d like to do at the same time. It is pretty typical for most adults to have more than one reason for why they are doing something. But what happens when all of those reasons can’t be met at once?
Well, nowadays I can walk through a kitchen with a much lighter step. Like any practiced skill, I can handle all but the most complicated of meals with only about half of my brain switched on. Rinsing bowls, wiping counters, sharpening knives, adding to the grocery list, sorting things in the refrigerator – I can do them all while running a pair of sauté pans and keeping an eye on the bread to snatch it from the oven when it gets to the right shade of brown. No problem.
But even though I don’t still cook the way I used to, I haven’t forgotten the lesson of knowing when to focus on the most important win, when all of the wins can’t be had together. This has become a key principle in my career, both as an advisor, and as a business owner. Sometimes we have a single challenge that is so important to the overall equation that it makes it OK to fail on all of the others if doing so gives us the focus and resources to get the one main one. That’s not always the situation. But sometimes it is. Recognizing when you are in the midst of such a situation is a key to being able to wade through the tough stuff to get to the other side.
As we roll in to the end of the year I hope that you and your family have a chance to have many good meals together, and that the person doing the cooking doesn’t wreck the place too badly. The end of the year is of course also a time for reflection on the year drawing to a close and the one about to start.
When you look back at 2019, did you get the win you were after? When you think about how you’d like to see things go for 2020, is there one particular thing that you need to have happen even if nothing else gets accomplished? I hope that you can make progress and find success on many undertakings. But don’t underestimate the power of knowing which one is most important. Throwing all of your effort behind that one most important thing may lead to results that are simply impossible when split focus is the tactic of the day. You need to be thoughtful about the things which may go unaddressed – a lot more thoughtful than I was back during my early reign of kitchen terror. But don’t automatically rule out the possibility that those lesser goals may be part of the price you have to pay to get the big one. Sometimes, the big one is worth it.
By Brad Thomason, CPA
What kinds of things do you spend your time thinking about?
It’s a simple question, but one that’s not so easy to answer. As I’m sure you are aware, in the span of just a couple of minutes we can jump from one topic to the next and end up a long way from where we were in less than the time it takes to drink a cup of coffee.
I raise the question though because it ends up being a factor in the mission of planning for retirement income. As we have discussed before (and as you have probably seen from any number of other sources), most people report that they don’t really spend an adequate amount of time thinking about and working on their retirement plans.
I have been interested in the question of why that is for many years. I have developed a degree of comfort with the belief that I will probably never have a complete answer. But I think that one of the factors - a major one, most likely – is that at the end of a typical day, most people are already too mentally fatigued to get in the right frame of mind to make headway on the project. As such, it gets pushed to tomorrow. Tomorrow the same thing happens. Next thing you know, 30 years have passed.
When we go looking for means to bring about change in basic human behavior and the default ways in which our brains work, I’m not sure there’s much to be encouraged about. Someone pointed out a long time ago that we are creatures of habit, and the evidence seems resolute on that point.
But as to the matter of why we got mentally fatigued in the first place though, there may be something we can work with there. I have noticed over the years that there is a category of decisions which people are willing to attack with great vigor, but which in the end, don’t amount to a lot. Being on the lookout for these can yield some big dividends.
I first noticed this set of circumstances back in the days when people still had land lines and there was a great quest to find the cheapest long distance provider. The latter day version has to do with which phone and which data plan. Other versions include obsessing over what kind of car to get, and/or whether to lease or buy. Picking a vacation spot is for some, a strong contender. The fact that Vacationer Planner is now a viable profession tells us a lot about the importance assigned to such decisions.
I think what is going on here is that people see these decisions sitting there, and they appear to be easy as compared to retirement planning and similar activities. People, perhaps unconsciously, do some mental math and conclude that while they don’t have enough left in the tank to tackle the big stuff, they probably do have enough to tackle one of these lesser questions.
But here’s where it gets interesting. Once they get involved, they end up turning all of the higher level brain functions back to the ‘on’ position. They start spending mental energy at a high rate. They go about these minor decisions as if they were of great import; they do a job that would earn them an A if the whole thing were an assignment in graduate school.
Which in turns makes them even more mentally exhausted, and that much less likely to take up more important questions and actions.
The little stuff ends up getting the attention, and the big stuff not only stays on the shelf, it gets pushed even further toward the back.
Now obviously the underlying theme here is prioritization. But this is more than a mere call for prioritization. We need to understand that when we don’t prioritize, not only does the more important thing go undone for the moment, there is also the possibility that we have made it even more unlikely that we’ll get to the important thing anytime soon. If a normal day greatly diminishes our stores of mental energy, adding minor decisions on top can fully deplete us – perhaps to such a degree that we can’t recover from just a single night of sleep.
An easy way to think about prioritizing decisions is to ask yourself the simple question of whether or not the thing you are contemplating is going to have an impact on when you can retire. If not, it may not be a major decision.
As for the little stuff, I’m not saying to ignore it. I’m just suggesting you recognize those decisions for what they are and treat them accordingly.
If you are wrestling with picking a data plan and the choices are $130 a month versus $150 a month, realize that you are not making a $1,800 decision ($150x12). You are making a $240 decision ($150-$130=$20; $20x12=240). As such, that’s probably like a five or ten minute decision. Not an hours-long process, or an entire Saturday lost to driving back and forth between competing providers trying to get the best deal. Knock it out and move on. I mean how wrong could you possibly be in that scenario?
In order to tackle big decisions, you need some mental energy available. It’s important to have an awareness of which decisions are big ones and which aren’t, so that you will know how to allocate your limited attention span (which is not an insult, just an apt description of how all of us work). If you burn it up on the little stuff, not only will the big stuff remain unsettled in that moment, it will probably also mean you need to recover before you are in the right frame of mind, pushing it even further out into the future.
No one would purposefully take the position that having the right cable package is better than having a well-engineered retirement. Just make sure to be aware of how you spend your time and attention, so that you don’t inadvertently end up putting more energy into the small thing than you put into the big thing.
By Brad Thomason, CPA
What if you have some stocks (or funds, or ETFS), sell them, and then the market goes up after that?
Well, you’ll likely experience a feeling of annoyance. You are likely to view those gains as being gains that are rightfully yours and could have been yours, save for the fact that you chose to walk away.
Those would be perfectly typical, and perfectly understandable thoughts to have.
But they wouldn’t necessarily mean you had made a mistake. When you want the second milkshake but don’t drink (eat?) the second milkshake, nobody really views that as a screw-up. Simply finding something attractive or desirable is not the ultimate arbiter of the question most of the time.
Sure you would want the gains. Obviously. But there are bigger questions at play, and it is those that determine how your decision should be graded.
For a long time I have made the argument that once people who are at or in retirement have enough money to drive the plan they’ve worked out, the justification for remaining exposed to the risks of the equity market becomes a lot harder to make. The practical implication of putting this belief into action is that each person will make an individual decision about when to leave the market; and that the decision really won’t have anything to do with what’s going on in the market (an external measure) but rather what’s going on with that person’s balances (an internal measure).
Everyone who is in the market rises or falls, for the most part, with everyone else. But the decisions of when to get in and get out are purely individual. And that’s something we shouldn’t lose sight of. You are only subject to the motions of the tide as long as you stay on the boat. But nothing makes you get on or stay on the boat but your own decisions.
Still, I get it. No one wants to miss out on something good that might happen. But in the end I think it comes down to a couple of sober realizations that don’t displace that desire, but which certainly exist right alongside it. The first is that once you have what you need to win, you really need to think differently about the prospects of losing it. Losses matter more to those who have more to lose; and if you have a fully-endowed retirement plan, then one could argue you have everything (at least financially speaking).
Investment market risk is something we often don’t have any choice but to accept because without investment returns our savings alone won’t grow to the level they will need to to do the whole job of ongoing retirement income. But once the need to grow goes away (because the target, plus a bit of overage perhaps, has been met), continuing to stay exposed to the risk starts to look more and more like gambling.
Second, everyone who exits equities is going to see them go higher at some point, anyway. At least that’s the conclusion history points to. Higher future market levels, for an exiting investor, are not an if, but a when. If you know going in that sooner or later the market is going higher, and you won’t be there to participate (because it is no longer a justifiable risk), why does it matter if the price increase happens the day after you leave or a year later?
It really doesn’t, not mechanically. It feels like it does. But the timing of the increase is less important than the reality of the increase itself; and you already knew the increase was coming someday. So why does the timing matter?
Anyway, while all of this makes perfect sense, if it was self-evident or easy there would be no need for people like me to write blogs about these complications. Nor would I do so had I not encountered actual investors mentally wrestling with this exact set of concerns. More than once. A lot more than once.
Even though it may not be easy, please consider the notion that the question of whether to scale back on stocks (or eliminate them altogether) changes as a person ages. Early in life, it is more of a return on investment question. But later it becomes more of an exposure to risk question.
At the point in time when it makes sense for you to walk away you are likely going to find it hard to actually do. Your brain will know it’s right, but some other part of you will be trying to hold the status quo. Part of that initiative will be based on the very real awareness that if you stay longer you may get more money.
But of course, you may participate in a drawdown, too. And if you don’t have enough money in other places to cover the bills, you will have to liquidate stock holdings at a discount, making those losses permanent. Which, back to the top, is why your brain knew it was time to go in the first place. And why you probably ought to listen to your brain when it determines you have reached that point in your investment journey. Irrespective of where the talking heads think the market is heading next.
By Brad Thomason, CPA
Today I want to point out something that you might not have ever thought of. I say that simply because it’s a point I seldom if ever hear anyone else speaking or writing about. Anyway, here it is: when you are looking at planning at the household level, it is the death of the second spouse that is most significant for income purposes.
Don’t read that as “the death of the first spouse doesn’t matter.” Of course it matters. But the point is that the period over which income is needed will be defined by the second death, not the first.
I am endlessly having conversations with guys who list out for me all of the relatives they have ever had who died before reaching the age of X. This is provided as some sort of proof that the speaker will not live longer, either (though in about half these conversations I’ve had over the years, the person telling me the tale is already older than the genetic clock has ordained…). I listen patiently. Then I remind him that none of that has anything to do with his wife’s prospects for a long life. After all, presumably (though I NEVER point this out), she has different genetic lineage. A somewhat surprised and embarrassed look usually comes into being; they typically stop talking. A few tell me, obviously chagrined, that I’ve raised a good point.
Which is the point of bringing it up here. In most cases, one spouse lives longer. It’s not always the wife, nor does that even matter for what we’re talking about. What matters is that the household is going to need income as long as either one of them is alive.
That’s the basic message. But now that you’ve got that, let’s move on to the master class.
Let’s assume that there were some reliable way to say that a person had a 20% chance of making it past such and such an age. I’m not aware of one, but let’s pretend for purposes of this little exercise, ok?
OK, so here in our mental laboratory there’s a 20% chance of living past, I don’t know, let’s say…92.
If there are 40 households, which we define as being made up of a married couple, how many households would we expect to run out of money if all of them only planned for income through age 92?
Did you come up with 8 households? 40, times 20%?
Sorry, but that’s not the right answer.
The correct answer is 16 households.
How? Because 40 households is 80 people. And 20% of 80 is 16.
The first-to-die from each household most likely lands in the 80% who don’t make it to 92. If you want to think about it in simplified terms, if we just snap our fingers and all the husbands are gone (sorry, guys) then we are already at 50%, 40 deaths out of our original population of 80. But notably, all of the households still need income at this point.
As the statistics play out over the next few years, the number of households goes down. But once we reach the point of 20% survivorship, there are still 16 people; and the odds are that most if not all are living in different households.
It is fair to mention that if we played this out many times in real-world groups of 80 we would see some that worked out this way, and other cases where both spouses in a household lived to be 95 while their neighbors across the street never made it out of their seventies. And so forth. But don’t let the possibility of different permutations get in the way of understanding the core principle. There is nothing in the assumed probabilities which would be violated if the final 16 survivors were all living in different houses. That’s the important take-away here.
This is but one of those situations in the retirement puzzle where the actual outcome is different than what it appears to be on first look. It serves as a good example of why it takes time to really dig into the details, in order to do the job as well as it can be done. Sometimes you have to give yourself time to realize that what you thought was the right answer, really can’t be.
Couples need to remember that they are planning for the income needs of the household, not the individuals. While doing that, they need to further understand that any predictions or assessments they make about the odds of running out of money have the potential to actually be twice as much as they predicted, due to the mechanical aspects of one spouse likely dying before the other.
By Brad Thomason, CPA
Did you realize that stocks are basically worth exactly as much right now as they were a year ago?
Wait a minute, you say. I thought that there has been a big run up this year.
There has been.
It’s just that in the final 10 weeks or so of last year, there was a big drop, too.
Despite the fact that we have indeed had new all-time highs on the Dow this year, most of the gains have just been a recovery of already-gained ground that was lost as we went into the final weeks of 2018. And those new highs? Just a few points higher than where we got to last October. This year’s 27,400 level (which we’ve flirted with a few times) is not much of a jump from the 26,950 we had in the first week of October 2018.
All of the fluctuation in between may or may not have meant anything to you. If you did not change your holdings – in other words no new money in, nor the withdrawal of any of your existing capital – the last twelve months have been flat for you. No net change (even if there was some heartburn and/or excitement along the way).
If you added to your portfolio, you may have had the opportunity to do so at lower levels; and if so you have some sort of gain on those dollars, even if not the rest.
If you had to take money out though, you may have had to do so during the dip, in which case you traded in the shares for what were essentially discounted dollars. The amount you ended up having available to spend (on whatever you needed the money for) was a lesser amount than you would be getting today if you were redeeming at post-recovery levels.
There are a couple of quick items I’ll mention merely as food for thought. First, the scenario I described affects more investors these days than it might have a few decades ago, due to the popularity of index funds. Even though the index levels have not had a lot of net change, the amount of rising and falling of the individual stocks that make up the totals has been much more active. It always is. Which on the one hand is part of the case for using the index fund in the first place. It mutes the effect of those individual movements.
Those movements, however, are where the potential for profit lies, especially during times that the market as a whole is not going anywhere. Just as with any other form of insurance (because that’s what a diversified portfolio is, whether you divide it up yourself or buy the diversification prepackaged in a fund or ETF), there’s a cost. Creating a situation in which you might lose less than you would have, comes at the expense of possibly earning less than you could have. Although the following statement is Monday-morning quarterbacking of the most brazen sort, it will nonetheless be true: Many investors over the last 12 months would have seen much more growth had they been holding a self-selected basket of individual stocks, as opposed to the prepackaged basket of a large index fund.
Second, if you feel like you are getting too old to be dealing with ups, downs, years of zero return without any reduction in capital risk, and conundrums over index funds versus individual stocks, well, you’re probably right. The general presumption as people get older and move closer to retirement is that the balance of the retirement savings will get bigger. It may not be possible to drive these balances to high enough levels without accepting some exposure to market risk during the working years. But as people approach retirement age, especially if the investment campaign has been successful, the attention should turn from making more to protecting what you already have. There is a point in just about every case where it becomes difficult, if not impossible, to continue to back the argument that equity holdings are suitable for the situation. When that happens – and preferably just before it happens – folks should consider an orderly retreat from such investments.
The stock market has been responsible for a lot of capital growth and the funding of a lot of retirement needs. It has been reliably up-tilted throughout all of modern American history, and is likely to continue to be. But not in a straight line, not without weird periods of unusual return activity, and absolutely never without an element of risk of loss.
If you are in the part of your life when you are still growing your balances for some far-off future, spend some time contemplating the pros and cons of being all-index, or perhaps mixing in some tactically-selected individual holdings, too.
If you are in the part of your life when it seems prudent to exit equities, or at least seems onerously stressful to stay, then maybe it’s time to listen to that little voice and plot a course to transition your capital into holdings that behave differently.
By Brad Thomason, CPA
Youngest son took critical comments I made about the state of his (truly deplorable) posture and parlayed them into a new desk chair for his room. I happened to be home when the delivery man arrived. He carried the box to the front door, where I took it from him and set it in the foyer to await the homecoming of its new owner. As I set it down I noticed a diagram on the side indicating that it was deemed to be a 2-person-lift item.
From the evidence at hand, neither I nor the delivery man apparently thought so. But it raises a point worth noting.
The thesis behind two people carrying something is of course that neither person has to support as much weight as a person alone would. The job is easier, and safer, because the load is being distributed. Whether or not one person alone could pick the thing up, as with our example, it is still the case that if two people do it, each person does less. The excess lifting capacity isn’t needed, because the collective force available exceeds that which is required for the item.
This principle is at play in the personal finance space, as well. The amount of money that a person needs to make for a given period of time (e.g. a year) from their efforts is tied to whether or not there is also a pool of investment capital in the picture. Just as the load on a single lifter changes when another one joins the effort, the financial mechanics of being salary-only differ from salary-plus-portfolio.
If you need $100 and you don’t have any investments, you have to work to earn $100. But if your investments make $25, you only have to earn $75. If they produce $75, then that only leaves $25 for the paycheck to have to cover.
In practice, this effect usually plays out over the course of our careers. When we first start out, pretty much anything we have is the result of going to work and getting paid. Toward the end of our careers, hopefully, there is a substantial portfolio of investments in the picture. The presence of that portfolio means that the math is different. Even if we choose to keep working, the load is divided and what we need to contribute from the effort side is reduced because of the contribution of the capital’s earnings.
To fully round out the picture of a typical case, note that at the end of the career we would expect the need to be lesser because you have finished raising and educating your kids; and if the retirement savings are fully endowed, you don’t have to worry about adding more principal. Lower income means less of a tax liability to fund, too, which further reduces the total required. So the need for a particular year could well be a lesser amount than in previous periods. And at some point Social Security is kicking in, so that acts like a third person (fraction of a person?) to help with the lifting, too. The percentage of the load that the earned income has to carry gets smaller and smaller.
The reason that this all matters, above and beyond the always-worthwhile aim of better understanding the specific operations of how your money works, is because of the potential lifestyle impact.
Whenever you take a job or engage in a business pursuit, you are implicitly making a decision about the price you are willing to accept to sell your time. In the early and middle parts of your career you are likely going to be looking for the highest price possible, even if it means doing some things you really don’t love, and doing them with an intensity and constancy that is at times exhausting. Since there is nothing else to help carry the load during those years, you may not feel like you have a choice.
But later on, once you get over the hump of getting your savings squared away, things change. Now to be clear, I am not advocating that you “retire early” and start dipping into your portfolio before it can tolerate such withdrawals (and still be there for decades to come). But as I have pointed out in other posts, amounts of money that seem insignificant in comparison to your career earnings behave very differently when there is also a big pool of capital in the picture.
Which in turn means that you have a lot more latitude when it comes to selling your time. Things that you never could have considered as a younger person now become reasonable, provided that you have everything squared away over on the savings side. Even if you can still keep earning at your prior levels, you might not have to.
To be sure, you need to step carefully here. Interrupting a win before it has the chance to fully come together is too awful to even think about. But continuing to push yourself hard after the point that it’s necessary isn’t the best outcome, either. Nor is missing out on something you really have an interest in just because of some vague sense of it not being worth your time.
Before you decide that the price being offered for your time is too small to say ‘yes’ to, do a bit of math and confirm that is actually the case. Because if you have done what you needed to on the savings front, what you can say ‘yes’ to at 65 or 70 may be a lot different than anything you could have considered at 40 or 50.
By Brad Thomason, CPA
I’m one of those people who believes the universe has a certain sense of humor. For evidence, one need look no further than the fact that Jimmy Buffett has got a really good shot at being remembered by history as one of the most influential philosophical voices of the current age.
Another honorable mention on that list might be Kris Kristofferson. Years ago he wrote, among other things, a song called To Beat the Devil. The most well-known cover of that song that I’m aware of was done by Johnny Cash. I still quite clearly remember the first time I heard it.
The chorus starts out like this:
If you waste your time talking to the people who don’t listen
to the things that you are saying, who do you think’s gonna hear?
And if you should die explaining how the things that they complain about
are things they could be changing, who do you think’s gonna care?
I won’t belabor the point. I’m sure you can see how that would resonate with someone who does the kind of work that I do.
I know beyond a shadow of a doubt that retirement planning and its related topics are important. It is, in fact, inconceivable to me that you would ever be able to convince me otherwise; anymore than you could convince me that water molecules contain something other than hydrogen and oxygen, or that the sun actually wasn’t there. It is a settled matter as far as I’m concerned.
I would even go so far as to say that all of personal finance is in fact, retirement planning. Every decision you make about every dollar you earn, don’t earn or spend, your entire adult life, will be a factor in what’s required to fund your life in the years after you stop working. Retirement planning plays ocean to the many trickles of dollars that make up its contributing estuary systems. It’s the place that everything is headed, the final destination. It is, financially speaking, the whole point of the exercise.
Yet if you look at what the averages say about retirement savings, you come away with an unavoidable conclusion: most people don’t appear to be very interested in this stuff.
Depending on where you look, you will get differing data, but most of it seems to cluster around the idea that the average balance for retirement savings in the US is south of $100,000.
Now that’s a weird result, for a couple of reasons. First, because it seems like a misprint given how much money is likely to be needed. A popular rule of thumb is that you need to have an amount equal to ten times your annual salary; and frankly our work suggests that’s not a very good rule of thumb (10x is not enough money). It’s also weird though because, in my experience, the average person is a pretty rare creature.
In other words, what that average probably reflects is a minority of people who have a lot more than that, and a majority that, unfortunately, don’t have even that much. If they have anything, at all.
If you really want to get a full view of this, do a bit of Googling yourself, and pay attention to the differences between average/mean savings and median savings. The point will become obvious right away.
Since resources are required for planning to be anything other than an impotent act, it is necessarily the case that discussions about retirement are de facto discussions to the minority.
But even among the minority who have more than the mythical average person, it is only the minority of that smaller group who are building toward something resembling what the drawing board suggests is going to be necessary to pull off a successful retirement (i.e. one which encompasses several decades of bill paying, and what not).
The messages about the importance of retirement planning (retirement preparedness, really) are never ending, constantly washing over all members of our society in newscasts, TV ads, billboards, those little things that interrupt Youtube videos... Yet seemingly only a few actually listen and act, and fewer still give it the attention that would seem to be both needed and beneficial.
And ultimately, it is for that small group within the larger whole that we do what we do. We know that most people don’t listen to the words that we are saying. I wish they did. But they don’t. And experience has taught me that I probably can’t convince them to change their ways, no matter how lucid or impassioned the plea.
So instead we focus our efforts on those who have decided, for themselves, that this stuff is both important and worth the effort to do right. When those people go looking for information on what and how, our goal is to provide them with things that are useful. When those people need help taking some step that is necessary to move them closer to their goal, we want to be available if they want that help from us.
I have not yet reached a point where I am OK with the vastness of the group who doesn’t listen and doesn’t care. When I wonder if I ever will be, I usually conclude it’s unlikely. But I decided a long time ago that couldn’t be the focus. Rather than despairing over the ones who don’t and wouldn’t, we needed to be spending our time doing things which would support the ones that did and would. Even if that group only represented a minority of the minority, they would still think it was important that they do a good job for their own family. And that was certainly sufficient motivation, and justification, for the part in their effort that we could play.
If you are reading this, there’s a good chance that you are one of that small group. Good for you. I hope that we have done our part to provide you with some things that have been valuable to you. We’re going to keep at it, and if you have suggestions about other topics we need to address, or better explanations for the ones we already have, I hope you’ll let us know. You’re the person we had in mind when we did all of this in the first place. So we want to make sure that it’s something you find beneficial.
By Brad Thomason, CPA
There is a lot more to retirement income than simply saving money. But saving money is the thing that sets everything else in motion, and the better the job you do of adding principal to the equation, the easier it is for all of the other factors to do what they need to do.
People often lament that it is difficult to save for retirement because they don’t have any money left after paying for “the basics.”
In my experience, most people have raced right past the basics and are living lives that are quite a long way from mere subsistence.
Still, an admonition to just spend less isn’t really very helpful advice. So instead let me point out a few places where money has a tendency to go.
The first distinction I would make is between one-time expenses and recurring expenses. The single price tag stuff tends to get the attention, but the stuff that you pay for year after year has the potential to be what really drains your batteries. For a stark example that you can do for yourself, compare the cost of a tube of toothpaste to the amount of money that a person is likely to spend on toothpaste over the course of a lifetime.
It is because of this aspect of spending that people can end up allocating more money to their pets or their yards than they do to saving for retirement. Making such expenditures in the moment seems pretty innocuous; yet when viewed big-picture one comes to see how frankly absurd it is.
As a result, this little mundane stuff can hurt you more in the long-run than a single big chunk spent at one time. A person contemplating some special trip of a lifetime might decide it is too expensive. In which case saying ‘no’ will feel like a responsible act. Which it is. But from a strict financial perspective, had the person required himself/herself to tighten up on nonessential routine spending, and then taken the trip as reward for being diligent, the net effect could easily have been better than denying the trip and letting the leakage continue.
Now that said, if we are talking about an expensive trip every year, then we are right back to talking about a recurring expense. Recurring doesn’t necessarily mean there’s a cash flow every week or every month. If you drop $10,000 on a vacation trip every year for two decades, that’s a recurring expense. Not to mention an eventual $500K to $800K or so that won’t end up in your portfolio.
Another key place to look at is vehicles. With cars, there are two main culprits, which often occur in tandem. The first is spending more money on a vehicle than is really necessary to get from point A to point B. The other is replacing the “old” one (before it is actually old) with a new one, too frequently.
People buy more car than they need just because they do. I tend to drive pretty basic stuff, but admit to having bought my wife nicer vehicles than was necessary. Doing so had the twin benefit of avoiding an argument, and doing something that made her happy. So those things have value in their own right, and I’m not trying to come off as judgmental in any of this. I’m just pointing out the mechanics. Which in this case is spending behavior that I’ve done, too.
As far as the replacement interval though, this one is largely based on superstition. The general line is that you want to get a new one before the current one starts wearing out and having problems. As such, at around 50,000 or 60,000 miles, it has to go.
This is basically hogwash. Modern vehicles routinely go 150,000 to 200,000 miles without any need for anything but standard care and maintenance. Early replacement is a classic example of how risk looms larger, and people take actions which are outside what the data suggests simply because they perceive the negative outcome as more costly and more likely than it actually is.
These two factors working in tandem can cost you a lot of money over the course of your life. Cars depreciate faster the newer they are. So if you flip that around, you realize that your average cost for owning any particular car – whether a basic car or one that was more luxurious than strictly necessary – drops every year that you own it. Therefore, if you are always buying new cars, then you are always getting the highest yearly costs.
Bottomline is that most people end up acting out of fear of a repair bill, and in so doing spend many times the amount the repair would have likely been, by way of steep depreciation on expensive cars that they turn over at a high rate.
Also on the vehicle front we should mention boats. Which some wiseass years ago defined as, “a hole in the water into which one pours money.” An accurate description, it turns out. Enough said.
Now, to the extent that some or all of that sounded like a rant, please know that wasn’t the intent. I have been a consistent advocate of the principle that you can do with your money that which you wish, and that position is well-documented now in a written record that is approaching a decade’s worth of blogs, alone. Moreover, I have spent money - at least a little bit - on every single one of the things I mentioned. So don't receive any of this as preachy.
That said, if you were wondering where you might look for a few extra bucks to stick in your retirement account, perhaps now you have a few ideas that you weren’t thinking about five minutes ago.
Older blogs (2015-2017)