By Brad Thomason, CPA
Human beings do not do well when they have run-ins with cobra venom. This is a universal truth. Cobra venom is highly toxic no matter what your home town.
That said, folks from Helena don’t have as much to worry about as folks from the outskirts of Mumbai. It’s not that a Helenite (is that what they call them?) is immune to the effects; but rather that cobras are in pretty short supply up in Montana.
When we look at risk from the investment perspective, it is more useful to look at exposure than the elemental aspects of the thing that can go wrong. While this may seem like a strange statement, it is something that you already do in other aspects of your life, perhaps without even realizing it.
When we bring electricity into our homes, we do not change the fundamental nature of the electricity; rather we put in place counter-measures to limit how much it can hurt us if something goes wrong. We make it workable without removing its innate dangerousness. Ditto with fire. The eyes on your gas cook-top are not 36 inches in diameter for a reason.
When we talk about exposure we are talking about the combination of incidence and impact. Incidence is how likely the negative event is to occur. Impact is the degree of damage it will cause if it does.
Again, people in Montana don’t have to worry about cobras as much because there aren’t any cobras around, in the first place. The incidence is sufficiently low that the risk is essentially nullified. The exposure is pretty much nonexistent.
In portfolio design, we accomplish a similar result through the way we allocate capital.
If you asked most people whether or not trading derivatives is too risky an activity for a retirement account, I think most people would say it is.
But I also think you could make the case that I didn’t give you enough information to answer the question.
If two people had a million dollars in savings, but one had $20,000 in a trading account, while the other had $400,000, wouldn’t we have to regard that as two very different scenarios? In the end, the part that would draw our attention would not be the trading itself, but the amount involved, right?
It’s very hard for the $20,000 we have walking around in the Indian countryside to hurt the $980,000 we have stashed back in Montana, so to speak.
Risk is a sufficiently important matter that we should understand it thoroughly, and that includes an understanding of a particular thing’s fundamental potential for destructiveness. But we should also understand that fundamental potential is largely theoretical. In practice, our exposure to the risk – not the risk itself – is what we need to be thinking about. How likely it is to happen, and how much it can hurt us, are what will impact our actual results.
The sun may be a fire so hot that it is basically a floating nuclear reactor. But knowing not to take the kettle off the stove and pour the contents on your hand is a more useful tidbit for making it through the typical day.
If this were an episode of Seinfeld I would figure out some way to end this post by serving tea to a cobra, or something like that.
But it isn’t.
So just keep in mind that your exposure to risk is what matters; and that one of the primary ways to control the exposure is via capital allocation. OK?
By Brad Thomason, CPA
Consider the following situation. You have access to a supply of investments which make a stated amount of interest, and you build an investment portfolio out of these assets. Some sort of bonds, perhaps; although in reality they could be anything. But let’s go with bonds to keep it simple, and let’s say they pay 6% annually.
Question: If the bonds earn 6% would it be your expectation that a portfolio composed of these bonds would also earn 6%?
Because it might not. In fact, it probably won’t.
This is a key aspect of investment returns that people need to understand in order to make quality projections about future earnings. Yet it is a topic that I don’t see addressed very often.
To understand how a portfolio composed of 6% assets could earn less than 6%, you have to get down in the weeds of what actually happens at the mechanical level with the assets. Bonds mature (properties get sold, etc). When they mature they stop accruing interest, and it is more likely than not that there will be some lag between the day of maturity and the day that the capital is reinvested. Every time there is a maturity, this will be a factor, for all of the dollars associated with that particular instrument.
In other words, the overall portfolio can’t possibly earn a full 6% because something less than all of its capital is earning a return every day.
Professional managers refer to this as capital deployment, and the odds of capital deployment reaching 100% at any given time are often low; and even if it happens from time to time, it never stays there permanently. Turnover in specific holdings is standard practice. So some portion of the capital ends up being on the sidelines as a result of the normal investment cycle playing out.
Note that this can be a factor even if you are on the ball with monitoring your maturities and have already decided what the next investment will be. Perhaps the broker doesn’t clear the capital right away (delays are actually the default procedure under Fed regulations, and most brokers do not voluntarily advance funds before the statutory clearing period has run). Maybe someone has to mail something to someone for a “wet ink” signature. Original documents still play a big role in finance. Or it may come down to the matter of how the proceeds are disbursed: for years we have advised our real estate clients to do everything via wire transfer because large checks – even certified funds – often get put on hold by the receiving bank for a period of a week or two.
In the end, a lot of mundane stuff, all of it perfectly common place, can work together such that your capital is on the sidelines for a month or two.
If the bonds you invest in earn 6% a year but the allocated capital only stays deployed for 10 out of 12 months, that capital will only make a 5% contribution to your portfolio return for that year. The result is that the portfolio will necessarily earn less than the 6% asset yield. As a matter of simple arithmetic, no other outcome is possible.
Beyond that, there are reductions to stated yield from carrying costs. Overnight shipping, wire transfers, custodial services and brokerage fees all go into an investor’s cost of doing business. These widen the gap even farther.
Now, to be certain, there is an entire category of situations in which the investment assets actually don’t make as much as you thought they would on the return front. This too is an unavoidable outcome which from time to time comes home to roost; it is the most obvious reason that investment risk is a thing. Sometimes things don’t go the way you think they will. But the important point here is that even if everything does manage to go exactly according to plan at the asset level, it is still possible (if not certain) for the portfolio as a whole to earn some lesser amount.
So the next time you are reviewing your level changes from one year to the next, and the net winnings are less than what you were expecting, don’t automatically assume there’s something wrong with the statement or that something wasn’t properly credited to your account. What you are seeing might indicate something like that. But it could just as easily be the effect of the naturally-occurring accumulation math which lives inside all multi-piece investment portfolios.
Better still, expect it to happen, so that it doesn’t come as a shock or a source of stress.
This aspect of portfolio behavior is in turn one of the prime reasons why it is so important to be diligent about periodically updating (annually, for instance) your plan so that you can keep tabs on these impacts and others. Since even the best planning in the world can’t predict exactly what will happen, it is important to only use projections as far as necessary. When previous estimates become – through the passage of time – settled reality, it is best to throw the estimates out and recalculate with the actual data.
When you do, replacing an expected return with a lower actual return is a frustrating thing to have to do. But as I said earlier, it’s probably something you should expect to happen, at least to some degree. Moreover, perhaps you can take solace in the fact that the universe hasn’t singled you out for poor treatment. It’s something that happens to every portfolio owner from time to time.
Although it still irks me when I have to do it.
By Brad Thomason
To truly understand a thing it is often helpful to look at it from various angles. Analogies help us do this, and indulging in more than one analogy for a particular item is a productive and interesting way to end up with several lenses.
One analogy I like for the job of ending up with a successful retirement situation is the construction project. Like the hammer and nails kind. Building a bridge, building a house, whatever.
If construction is known for anything at all, it is known as being an activity which essential never goes as planned. Virtually every construction project ends up taking longer, costing more, or both, than what people expected and hoped for at the outset. This is widely known, widely studied within the industry, and apparently ubiquitous and fated. No entity which I know of has ever found a way to completely defeat the problem. I do not know if there are records which document delays and overruns during the building of China’s Great Wall or the pyramids of Egypt. But I wouldn’t be even the least bit surprised to find out that they happened.
Sometimes you start digging the footings and find out the soil is so soft that it will take three times as much concrete as you originally budgeted. Sometimes it pours a monsoon for three straight days when your site guys need to be digging. Sometimes the materials you need are back ordered. Sometimes they’re in stock, but the delivery guys have too many orders ahead of yours to get there today. Sometimes, when you call for an inspection, the inspector is there the next day. Sometimes it’s a week. Sometimes he finds one minor item – one which will take ten minutes to fix – but it ends up being another two weeks before he can get back for a re-inspection. Sometimes the electrician takes a day longer than expected, and as a result the plumbers can’t get in there on Wednesday to do their thing. Neither can they just come on Thursday, due to other commitments. So it ends up being Tuesday of next week. Which throws off the framing inspection. Which delays the insulation guys…
Sometimes an investment doesn’t earn the return we thought it would. Sometimes we liquidate an asset, but there’s a lag until we reinvest the proceeds, so that capital sits idle and unproductive for a time. Sometimes insurance premiums rise at a faster rate than we expected. Sometimes employers reduce the amount of match they offer on 401(k) contributions. Sometimes we spend more on a vacation or a car than we had originally planned. Sometimes one of our babies has to get an unexpected Master’s degree. Sometimes a family member develops a chronic medical condition, adding a new line item to the recurring budget.
See the similarities? Lots of moving parts, doing their moving over a span of time, and in some respects predictably unpredictable.
Unfortunately for a lot of people that’s where the similarities end. The default response to delays and extra expense on a construction project is that you just keep at it until the thing is finished. A 90% complete house doesn’t do much for you. So you stay at it until the original goal is complete, and sort of shrug your shoulders at the clock and the tab, because in the end the mission was to complete the build. So you complete the build and count everything else as secondary.
Many people don’t do that in the retirement situation. Instead of staying at it and continuing to build until what they have constructed is sufficient to the upcoming task, they stop mid-construction because they decided at some point in the past that they would stop at that particular time.
If you ask them whether or not they know that their savings have a job to do, they will say, “Of course.” But if you then ask why they are basing the decision to stop building on the expiration of an arbitrary interval, rather than the completion of the project, they may not have much to say.
If you think about it, the idea of retiring at X age is sort of a hold-over from the days when most retirement plans were the old-school pension sort. You retired when you reached a particular age because that’s when the pension payments were going to start. But if your equation doesn’t have any pension payments in it (other than Social Security, which you have some latitude over when you start), then other than a personal preference or a convenient measurement, what does attained age really have to do with anything?
You would not send your builder away if the house wasn’t finished just because it’s the last day of the month and you had said at the beginning of the project you wanted to be finished by that date. You’d stand out in front of your still-active construction site, one hand on a hip, the other perhaps holding an adult beverage, shake your head a little bit, and hope that another 30 days will be enough to finish. And whether it was or it wasn’t, you would stay at it until the thing was truly complete.
Is there really a good reason to do anything else on the retirement front?
By Brad Thomason, CPA
Conferring with an expert is a good thing to do if you have a complex task ahead of you. In a second I’ll give you the top three reasons why.
But before I do, to reiterate the theme of the last couple of posts, let me tell you what an expert can’t do.
Experts can’t predict the future. They can’t tell you how everything is going to play out. Not because they aren’t actual experts. But because, in addition to being experts, they’re also human beings. Who can’t predict the future.
Just to be perfectly clear, I’m telling you so you won’t make the mistake of asking one to do so. Big distraction, huge waste of time, sets impossible expectations, creates tension and disappointment on both sides. So you know, don’t do it, OK?
What then can an expert do for you? Here are my top three favorites:
1. Save you time. Information that you might spend hours (or days, or weeks…) searching for may be top-of-mind-stuff for someone who works in a particular field every day.
2.Foot guidance. As in, they can tell you to put your foot here and not there. Ounce of prevention.
3.Clean-up on Aisle Three. When things don’t go as hoped, perhaps because you ignored the suggestion on where to put your foot, having an expert on hand for Plan B can be a wonderful thing. When you turn around and ask, “What do we do now?” it’s pleasant to have that question fielded by someone with an answer that’s better than, “I dunno.” Pound of cure. Pounds of cure, in some cases.
So short and sweet. Big fan of experts (which shouldn’t surprise you…). Think you should use them (ahem, us) for any number of things.
But don’t ask us to predict the future. That’s not a service we can provided. We can often tell you what’s likely, how things may play out if the situation breaks left instead of right, and what to do about it if you have to reload and try again. But we can’t predict the future.
And by the way, if you find yourself in conversation with someone suggesting that he/she can, then follow your instincts and remain open to the probability that maybe that person is actually not much of an expert, after all. A true expert should know better, even while understanding how badly you want to be told otherwise.
By Brad Thomason, CPA
Consider the following two yet-to-come events: the 2020 presidential election, and the construction of a new bridge over your favorite-est river.
If you go to a civil engineer and ask her who she thinks will win the election, she can answer your question. But the answer will simply be a guess. Humans can’t predict the future.
On the other hand, if you ask her for a bridge design which will support car and truck traffic, she can give you one. And when you build it according to the design, it will do the job as expected.
So how is it that the engineer can predict one future event, but not the other?
Because the bridge thing isn’t actually a prediction.
There is a special category of situations out there in the world which are said to be “deterministic.” That’s the fancy word the philosophers hung on them. Essentially, a deterministic system is one which will play out in a definable, mechanical way once the initial conditions are set. There is a rigid adherence to identifiable factors that is so consistent that it doesn’t matter whether they have happened or not.
If the hammer strikes the nail, we know what is going to happen to the wood beneath.
If your cat knocks your coffee cup off the kitchen table, there’s no mystery to what comes next.
If a lever of x length needs to lift an object of y weight, then the lifting force will have to be z when the fulcrum is two feet away.
If we need to put a rocket into space and then bring the people inside back safely, then we gotta start doing math involving thrust and velocity and rate of oxygen consumption and heat shield thickness.
But in all of these, we can know how they’re going to play out beforehand. In fact, so much so, that we don’t even have to actually play them out.
Notice that all of these examples are of a type that you would commonly find in a high school physics classroom. That’s because the version of physics taught in high school is essentially the mechanics of deterministic systems (i.e. Newtonian physics; not relativistic, nor quantum mechanics).
There are aspects of finance which are deterministic, too. If you have $400 in a bank account and you are spending $100 a month, then you can keep that up for four months. If you bought insurance for a particular event, and it occurs, the policy will pay whatever was described in the contract.
But there are a lot of questions in finance which aren’t based in determinism, too. Failure to realize (and respect) this most-important distinction leads to a lot of the problems people run into when trying to plan and manage their affairs.
Once you move past CDs and Treasury bonds, returns start to become less deterministic. That’s the basis of why they are considered to be riskier. Because they may or may not occur as planned.
Inflation rates aren’t deterministic. Your future medical history is not deterministic. The degree to which a family member might need financial assistance is not deterministic, and so on.
In the face of this, we have to make plans on the basis of what we deem to be plausible possibilities. Then, as the future becomes the past, we have to look to see how well reality matched up to what we guessed was going to happen (because make no mistake: no matter how hard you work at it or who does the projections, it’s still just humans making guesses about a future which can’t be predicted). Based on what we discover, we may have to reset and modify the plans we started with.
What we shouldn’t do is respond to the fact that we can’t predict the future by trying to get someone else to predict it for us. Because someone else can’t do it either. In our next post we’re going to address the common things an expert can do for you. But let me go ahead and give you the punch line: being an expert does not confer the ability to predict the future. Experts are still humans. Can’t fly. Can’t teleport. Can’t predict the future. No aliens, no X-men, no nothing. Just people, just like you.
Life would be easier if more of the big financial questions dealt with deterministic systems. But they don’t. So we have to take the handful of easy answers where we find them, and spend the remainder of our time and attention dealing with the world – and the future – as it is, not how we’d like it to be.
By Brad Thomason, CPA
As an Auburn grad, I find myself in the relatively unfamiliar territory of caring what happens in the upcoming NCAA tournament. In my 30+ year association with the Tigers, I’m not sure how many times we’ve been here. But it ain’t been many.
Nonetheless, you would have to have been living under a rock to not be aware of how much hoopla and excitement surrounds the tournament every year. It’s a big sporting event that hits the calendar at a time when not a lot else is going on. But that’s probably only half the explanation. The other half seems tied to the widespread love of prognostication that ramps up this time of year.
Everyone seems to have an opinion – an expert opinion, no less - on who will be seeded where; and once the official list is in, everyone has their version of how the games will play out. So much so that the games themselves almost seem incidental, at times.
You can even Google the invented word “bracketology,” a straight-forward reference to the bracket structure used to illustrate the tournament participants, and find an astounding amount of information.
Well, you can find an astounding amount of content. How much information is there, is questionable.
You see, humans can’t predict the future. So when a bunch of humans get together and start talking about what is going to happen, then it bears remembering that it is all, in the end, just a bunch of gibberish. It has no impact on reality. There is no authoritative weight behind any of it. Things like insight and faith and certainty don’t have a place here. It’s all just guessing. No matter the supposed rationale. No matter the track record for having guessed right in the past. No matter the resume of the person doing the guessing. Still just guessing.
Since the subject matter is basketball, it’s OK. It’s all just for fun. There are no consequences for being wrong (or at least they are limited to the size of your bet, if you put your money where your belief was).
But if we start to apply similar behavior in other areas then the situation can be a lot different. If we start to think that we (or some other human) can state what the stock market is going to do, or where inflation rates will be 5 years from now, or how many years we’ll be able to dodge a trip to the hospital for a serious matter, then we are basing our expectations on something that is very flimsy.
We’ll have more to say about future events (and the viewpoints of experts) in later posts. But for now it is sufficient to focus on the core point. Spend all the time you want reading articles, listening to interviews, and working the voodoo on your own version of how the bracket will play out.
But don’t lose sight of the fact that it’s all just guesswork, no matter who it’s coming from. Doesn’t matter how much they know about basketball. Doesn’t matter how flashy their production studio is or how much money they spent using computers to come up with the predictions. Still just humans guessing. Humans who can’t predict the future.
And more importantly, when you get ready to switch focus to the more serious topics of your life, don’t be fooled into thinking a fun, play-time activity is a good model for how deal with future events which actually will have an impact on your life. Because it isn’t.
By Brad Thomason, CPA
When you stop and think about it, isn’t all of personal finance really just an aspect of retirement planning? Every dollar you earn, or don’t earn, or spend, your entire adult life, impacts how things go when you reach retirement.
We all start out on pretty similar tracks, if for no other reason than we are all supposed to go to school for the first couple of decades of our lives. One ten-year old’s day looks pretty much like the day other ten-year olds are having.
Then we split off and go in lots of different directions. How a policeman spends his day is very different than the way an architect spends hers. Veterinarians versus pastry chefs; teachers versus welders; bankers versus HR managers. Lawyers versus anybody (everybody…).
But in the end, we all head back toward a similar destination. Just like raindrops meandering back to where they came from in the first place, we all come back together, we all become more similar again, in retirement.
This is significant for a couple of reasons. Warren Buffett has mentioned that he long ago got in the habit of looking at price tags as if they were ten times as much as the price listed. He reasoned that he was about to use a dollar, which would someday be ten dollars, if he chose instead not to spend it. Now, I don’t think you can go through life torturing yourself over “$50” fast food cheeseburgers. But it makes a good point. If you spend it today you can’t spend it tomorrow; nor will it have time to make any more dollars to keep itself company. Is that thing you want today worth ten times what you are about to pay for it? Because in the end, that may be what it costs you.
Realizing that it all fits together, and that today’s actions directly impact tomorrow’s resource base, is a good thing to think about if for no other reason than it’s true. Knowing how your world works is important without any higher purpose, as a means unto itself.
It’s just that here you get both: the people who take time to think about this stuff are the ones who come to understand just how big a job we’re talking about. Paying for what may end up being several decades of expenses, living just on your assets and not working anymore, is a pretty tall order.
Those who learn this early and keep it in mind as they travel through their career years have a much better chance of having the next period go the way they want it to.
I would not want to have to figure out how many different ways there are to drive from Jacksonville to Seattle. It would be a big number, I’m sure. But in the end, wouldn’t the governing factor be that we were headed to Seattle? The particular route that’s chosen still ends up in the same basic spot.
Financially, assuming we live that long, we are all headed to retirement. We don’t have to be pre-occupied with it every second of the journey. But remembering that it’s what we’re doing is still a good idea. Periodically stopping to check the route has obvious benefit. The Maryland/Pennsylvania line may be a long way away from Jacksonville. But if you’re about to cross it, it’s best to realize that turning left is likely a better next step than continuing straight.
Well, I think that mixes up the metaphors enough for one day. So I’ll leave you with this. That classic book about the habits of highly effective people suggests that you start with the end in mind. Your end is retirement. Which I know, because that’s the end for all of us. You are working toward it whether you realize it or not, and whether you mean to or not. So I thought I’d just point that out.
By Brad Thomason, CPA
Very early in my career I had a conversation with a prospective client, which at the time, felt quite surreal.
This was back in my broker/dealer days. He came to my office because he had some money that he wanted to invest in something. We discussed several possibilities. But each time I laid out an option, all he wanted to know was the minimum amount he could invest, and how quickly he would get his money back.
When you are young you assume that people who are older than you are know what you know, plus presumably some extra things that you don’t yet know. But the perspective is very much, “I’m only x years old and I know this, so I’m sure you must know it too since you are older.”
As I am no longer a young person on much of anyone’s scale, I now know that isn’t the case. Wisdom may come with age, but it’s not a given that knowledge does too.
What I of course knew was that investment returns come from having capital deployed. Wanting to minimize the amount of capital and/or the amount of time it was deployed would work against the prospects for making any sort of meaningful returns. To earn the most money you needed to send that capital out and leave it alone to do its thing.
Since that first experience I have had similar conversations more times than I can recall. Because it has happened many times now, it is no longer surreal when it occurs. Though I admit, it still seems to me like the whole thing is a pretty basic principle that one would think more people would pay attention to.
It may stem from the fact that the attention almost always seems to first be focused on the rate of return. It doesn’t take any insight nor imagination to see why someone would want a higher rate than a lower rate. But what sometimes get lost when rates are the focus and the other elements are forgotten, is that when you have consistent deployment over a period of many years working for you, seemingly small changes to rate can make a bigger-than-expected difference.
Most investors don’t get particularly excited over an 8% return. Sure, it beats a lot of what’s out there, and there are many instances when a person switching to such an investment would start making more money. But exciting? The kind of stuff you go bragging to your pals about? Not so much.
Yet a sustained 8%, even as compared to something else at 7%, can produce meaningful effects. If a 55 year old starts an investment with $250,000, it will grow to almost $690,000 by the age of 70 if the compounded return is 7%. But it will grow to more than $790,000 if it’s 8%, just one point higher.
If we expand out to a twenty-year time frame the difference is even more pronounced: $965,000 for 7%, versus $1,165,000 for 8%. Nearly $200,000 more.
The knee jerk is often to want your money back quickly, and to only be interested in big, flashy-sounding returns. Yet most success stories are built on an understanding of cumulative returns, over a sustained period, with merely-solid returns (i.e. 5% to 8%, in a lot of instances) driving the effort.
I hesitate to go so far as to say that there’s a right way and a wrong way to do all of this. Doing so might imply a degree of judgmentalism and/or unfounded opinion that I’m not sure is really the consultant’s prerogative to assert. It is your money, after all. I think such a statement also runs the risk of implying that if you don’t follow one precise recipe, you’ll have blown your only chance of getting the win. Which is simply not true.
Nonetheless, there are mechanical realities to the way money behaves and grows, just as surely as there are set understandings of how water flows down hillsides and what’s required to build a bridge capable of holding up a truck. If you ignore these factors, you are unlikely to get the results you are after. Or if you don’t know them in the first place.
Send it out; leave it out; don’t let the quest for great returns get in the way of earning good returns; time is your friend if you have something for it to work with (i.e. principal), even if the returns aren’t eye-popping. Those are the basics. And they matter.
By Brad Thomason, CPA
Smith and Jones live on a planet in a galaxy far, far away. It costs $100 a year to live on this planet.
Smith makes $100 a year. Jones makes $200 a year.
Question: Is Jones twice as well-off as Smith?
Answer: No. Jones is infinitely more well-off than Smith.
That’s because Jones has an opportunity to build wealth, and Smith does not. The fact that Jones has a higher income than what he needs for immediate bills breaks the seal on a source of incredible economic power. The money he has above and beyond what gets depleted in the same period that it’s earned, is money of a completely different type. That money has productive capacity – the ability to replicate and multiply itself by way of investment returns.
In time, the amount of money that Jones possesses will come to far exceed the simple sum of each year’s extra portion. The extra $100 he received in the first year may come to be $500 or $600 at some point out in the future, as the result of compounding returns on the original seed amount. Maybe more. Maybe a lot more. And the excess from each successive year is a candidate for getting on the same path to expansion.
One day in the future Jones could have a pile of money that he will never outlive, even if he quits his job. Smith, on the other hand, will not be able to afford such an option. He’ll have to keep matching current income to current bills.
Sometimes we get caught up in very complicated lines of thought when we are engaged in managing our finances. But many of the most important things to remember are also the most basic. Having some investment capital in the first place is the pebble in the pond which sets up all the rings which will grow in the future. For most of us, that capital will come from not spending everything that we earn.
Entry to the club really is that simple. Or maybe straight-forward would be a better term. Because sometimes it is difficult to end up with a little bit of surplus each year. But there’s no mystery about how you become an investor and start the process of building wealth, even if doing it may require some effort, or even discomfort, in another part of your life.
Note also that this dynamic persists all throughout your working years. At any point along the way that you make money which doesn’t get immediately spent, you get to tap into this power source over and over again, in ways that are cumulative at an ever-accelerating rate.
Which, if you stop and think about it for a minute, is pretty dang cool.
Our planet is a little more complicated than the one that Smith and Jones live on. The possibilities for what a person might make, and the range of things that a person might spend that money on, are far more varied. But the financial underpinnings are the same. If you can find a way to turn some of what you earn into productive capacity, you are on the road to being more like Jones. Which, to me, seems a lot better than being more like Smith.
By Brad Thomason, CPA
It takes a lot of money to live a long time. You won’t know until the end exactly how much, because you don’t know when the end is going to be. We’ve discussed this before. But it stands to be a lot.
On the day that you decide to retire you will either have enough money to go the distance, or you won’t. The only way to know for sure (or at least something approaching certainty) is to have so much money that it is likely to last well beyond any remotely realistic life span. If you are 65 and can reasonably fund your lifestyle as you know it today for the next 60 or 70 years, then we can all pretty much assume that’s going to be good enough. Probably 30 years will be good enough (though more people live past 95 than you probably think; and it’s plausible to think even more will do so in the decades to come).
But the point here is that you will have enough money to “overwhelm the problem” (of ongoing expenses), or you won’t.
If you don’t have a high enough portfolio balance to play the overwhelm card, you are going to have to do something which you may not want to do. Here are your four basic options:
Option 1: Postpone your retirement date and keep working in your current career/position.
Option 2: Semi-retire. Either cut back on hours (if your employer is amenable) or switch to some sort of different position (or even field) for a few years when your formal career comes to its end.
Option 3: Take a more active stance as an investor, and in so doing take on more hassle and/or risk than is ideal (and maybe more than is even advisable…) in pursuit of higher returns.
Option 4: Gamble that you will die early enough to keep depletion of your assets from being a problem.
Yes, I know none of that is going to get labeled as feel-good information. But it is the truth. And given the title of the post, hopefully you weren’t expecting feel-good anyway. If you were, sorry to be a downer.
But in spite of all of the speculation, professional opinion and advice-giving that is an inseparable part of a modern retirement discussion, there are certain underlying realities, mathematical givens we might call them, that underpin all of it. They are utterly factual, utterly immutable, and as potentially harsh as any other aspect of the natural world’s fabric.
If the question is one of spending, then knowing what’s in the kitty will always be a substantial concern. And one number –projected outflow vs balance available - is almost always bigger than the other. A win or a loss follows therefrom, in the most mechanical, impersonal of fashions. Just the way it is. When faced with the proposition of a potential shortfall, the four items listed above are the most common responses; despite wide understanding that none of them are great.
Information of this type is presented to provide a jumping off point for decision making. If you haven’t retired yet, you can decide to enter these waters, or try to use your remaining years to drive your balances high enough to get in position to make the overwhelm card possible. If you are at or already in retirement, you can consider these various possible paths, and spend a minute contemplating which strikes you as the least of the evils.
Look, no one can realistically make the case that being short of funds is a good thing. So my take on it is, let’s not even try. Instead, I think better outcomes arise when we survey the landscape as it is – not how we want it to be, or in some abridged or fictitious way designed to spare people discomfort – and go from there. Solid ground is a good start for good decisions, even if the solid ground itself is unpleasant.
Plus, even if I tried to spare your feelings, you can do arithmetic as well as I can, and you would know anyway. Right?
So if you aren’t yet in this situation and don’t wish to be, you know what you need to do to try to affect the outcome. And if you are, now you know what your most likely options are.
OK. Now I’ll let you up for air. I’ll try to make the next post a little more cheery.
Older blogs (2015-2017)