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.
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