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.
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