Retirement: Start Saving Regularly, Even If You Start Small

T. Rowe Price has a brochure The Benefit of Saving Regularly For Retirement [pdf] which has the common advice that you target saving at least 15% of your gross income each year to prepare for retirement. Of course, the earlier you start, the better. The added wrinkle here is that they offer an alternative route if you find 15% a stretch when you are young.

In their simulation, if you start saving at age 25 at a 6% rate and increase it 1% each year until you reach 15% (and then stay at 15%), you’ll actually come out ahead of someone who starts saving at age 30 at a 15% rate. You’ll even do okay if you start at age 30 at a 6% savings rate and increase it 2% a year until your reach 15% (and then stay at 15%). The two big takeaways are (1} start, even if small and (2) bump up your savings even if just a little by banking some of your raises each year.

The assumptions made seemed largely reasonable:

Examples beginning at age 25 assume a beginning salary of $40,000 escalated 5% a year to age 45 then 3% a year to age 65. Examples beginning at age 30 assume a beginning salary of $50,000 escalated 5% a year to age 45 then 3% a year to age 65. Example beginning at age 40 assumes a beginning salary of $80,000 escalated 5% a year to age 45 then 3% a year to age 65. Annual rate of return is 7%. All savings are assumed tax-deferred. Multiple of ending salary saved divides final ending portfolio balance by ending salary at age 65.

Bottom line. Start saving regularly, no matter the amount. Even if you feel like you can’t save 10% or 20% or whatever you read somewhere, just should start as soon as possible with a smaller number. After a year, try to increase your savings rate by 1% or 2%. Repeat each year. This can help minimize how much you “feel” the savings, while still ending up with a healthy nest egg. Build the habit.

Reminder: Don’t Put Too Much Employer Stock Into Your 401(k)

Every time a large corporation stumbles, you will see something along these lines: Having Too Much Employer Stock in Your 401(k) Is Dangerous. That doesn’t prevent it from being solid advice. The best advice bears repeating.

Why? If your retirement savings are heavily concentrated in your employer stock, you human capital and your investment capital are directly linked. If your company falters, then you can lose both your job and your retirement security. Past examples include Enron, MCI Worldcom, and Tyco. Remember that any individual stock can go to zero.

In a large, multinational corporation, even a mid-level executive simply won’t affect the bottom line that much. You could be doing a great job, but what if the top brass commits fraud, takes on too much debt, or otherwise mismanages the company.

This time around, it is General Electric (GE). Per Morningstar data, $100,000 invested in GE stock on January 1st, 2017 would be about $47,000 today. Over the same period, $100,000 invested in a S&P 500 index fund would be about $124,000. That’s a gap of over $75,000 on a starting balance of $100,000. GE may recover eventually, but even that won’t help a retiree who needs the money now.

The Fortune article provides a list of other large company 401(k) plans that have heavy allocations to their own stock. Some of these are highly-respected companies, but then again so was GE.

  • Sherwin Williams (62%)
  • Colgate Palmolive (56%)
  • Exxon Mobil (54%)
  • Lowe’s Home Improvement (50%)
  • PACCAR (50%)
  • Dillard’s Department Stores (48%)
  • Chevron (44%)
  • McDonalds (39%)
  • Costco (38%)
  • Cerner (37%)

In my opinion, things are different if you are a majority owner of a small, private business. Yes, you also have a lot of eggs in one basket, but you directly control that basket! In addition, your upside could be much, much greater.

Consider that Vanguard charges money for financial advice through their Vanguard Managed Account Program (VMAP). When they analyzed the before-and-after results from actual participants, they found that their biggest impact was simply helping people reduce their exposure to company stock. They found that 12% of participants initially had a concentrated position of 20% or more in employer stock.

If you’re reading this, you can implement this advice for free! Do not invest more than 10% of your 401(k) plan in company stock. Consider reallocating funds into a low-cost, diversified index fund or other similar alternative. (Companies themselves are not allowed to exceed 10% in company stock for pension plans.)

Social Security Trust Fund: Income vs. Expenses

You may have read recently that the Social Security Trust Fund is starting to shrink, and that it is projected to run out of money in 16 years. (Medicare’s trust fund is projected to run out in 8.) This is not the same thing as Social Security itself running out of money, as most Social Security payments to retirees come from the payroll taxes paid by current workers. As the NY Times points out:

…tax collections would be sufficient to pay about three-fourths of promised Social Security benefits for 75 years.

Of course, a 25% cut is still going to be extremely painful for a lot of people. However, I don’t expect any changes soon. As the WSJ Daily Shot points out, Social Security has had a cash deficit each year since 2009. (More was being paid out in benefits than was taken in by payroll taxes.) The deficit was simply masked by interest earned on the fund until recently:

“Fixing” this problem is going to hurt somebody in the pocketbook – either younger workers or retirees, probably both. That means no politician is going to do anything about it unless there is no other option. The following chart of income vs. expenses suggests that about 2030, the trust fund will be nearly depleted and the rate of depletion will be quite fast.

So that’s my prediction. All talk and no action until 2030.

Retirement Nest Egg Calculators: Running Out of Money vs. Running Out of Time

If you have researched retirement at all (early or otherwise), you’ve probably ran across various retirement calculators online. You input how much money you have (or plan to have), your asset allocation, and it spits out some numbers. This Vanguard Retirement Nest Egg Calculator is a good example of a simple version.

Let’s try an example. If I am 40 years old and thus assume I have up to 50 years left in retirement, and I want to maintain a 4% withdrawal rate ($40,000 a year from a $1,000,000 portfolio that is 65% stocks/30% bonds/5% cash), the tool uses Monte Carlo simulations to calculate that I have an 80% chance of lasting 50 years.

There is effectively one output: the odds of not running out of money. Either you still have at least a dollar, or you don’t. In my example, I have an 80% chance of having $1 or more at age 90.

But what if you also considered the odds of running out of time? Yes, that’s a euphemism for dying. (Ever notice how many of those we have?) In another neat tool from Engaging-Data.com, Will Your Money Last If You Retire Early? adds some helpful nuance to this analysis. You input the same types of information, but now in any given year you are provided the overall odds of each of these things happening:

  • Red – You are alive, but ran out of money.
  • Light green – You are alive, with less money than you started with. (Kinda nervous?)
  • Green – You are alive, with between 100% and 200% of what you started with. (Nice and comfy.)
  • Dark green – You are alive, with over 200% of what you started with. (In hindsight, I didn’t need to save so much…)
  • Grey – You are pushing up daisies. (In hindsight, maybe should’ve retired earlier…)

Here are sample results for the early retirement scenario above at 4% withdrawal rate (age 40, retirement horizon 50 years, $40k from a $1m 65/35/5 portfolio). I picked the female mortality table – if you have a male/female couple, it’s safer to pick the person likely to live longer.

There’s an angry streak of red where I’m broke. Of course, there’s a bigger streak of grey where I’m not breathing.

Here’s the same scenario, except with a lower 3% withdrawal rate ($30,000 a year from a $1,000,000 initial portfolio):

That change got rid of the red, but there is a lot of dark green. (1% makes a big difference.)

Here are sample results for a more traditional retirement scenario: (age 65, retirement horizon 25 years, $40k from a $1m 65/35/5 portfolio)

As a financially conservative person, these charts help illustrate why I prefer working with a 3% safe withdrawal rate for early retirement (50 and under) and 4% safe withdrawal rate for traditional retirement (closer to 65).

My favorite part of this tool is that it makes you take into account your mortality. It’s not all about staying above $1 in the bank, but also about maximizing your years of freedom. If you’re 40, you have a 10% chance of dying before even reaching 65. (This is why most people know someone who died shortly after retirement.) Is it better to have zero chance of broke and be 70, or 5% chance of broke and 60 with 10 more years of retirement (and 10 fewer years of work)? It is better to live a little more luxuriously for shorter time, or a little more frugally for a longer time? Playing around with all the different input variables might help you weigh the options.

Free Social Security Tool for Optimal Benefit Claiming Strategy

socialsecuritycardWhen to start claiming Social Security to maximize your potential benefit can be a complicated question, especially for couples. Two reputable services in the space, Social Security Solutions (aka SS Analyzer) and Maximize My Social Security cost between $20 and $250 a pop, depending on included features.

Mike Piper of Oblivious Investor has created a free, open-source calculator called Open Social Security. To use the calculator, you will need to your Primary Insurance Amount (PIA). This amount depends on your future income, so I would first consult this other free Social Security benefit estimator tool to more easily estimate your PIA. I believe the value you see at SSA.gov assumes that you will keep working at your historical average income until your claiming age (which won’t be the case for us).

Here are our results as a couple, assuming we were the same age (we are close) and with my expected benefit being slightly higher than hers:

The strategy that maximizes the total dollars you can be expected to spend over your lifetimes is as follows:

You file for your retirement benefit to begin 12/2047, at age 70 and 0 months.
Your spouse files for his/her retirement benefit to begin 4/2040, at age 62 and 4 months.

The present value of this proposed solution would be $657,749.

Basically, the tool says that my wife should apply as soon as possible, while I should claim as late as possible. I believe this is because this scenario allows us claim at least some income starting from 62, and if I die first after that, my wife would still be able to “upgrade” to my higher benefit.

The tool might take some time to run the calculations, depending on your browser. You can learn more and provide feedback at Bogleheads and Github.

I am not a Social Security expert, and I have not examined the source code or verified the accuracy of the results. I am inclined to trust the results as Mr. Piper does seem to be an expert on the subject. If I were close to 62, I would probably also use the paid services for a second and third opinion. Why? Spending $100 now could save you many thousands in the future. You may learn about concepts like “file-and-suspend” and “restricted applications”.

The best thing about this free tool is that it can introduce a lot of people to ideas that they would have not otherwise considered. Even if it lacks every bell or whistle, being free means it can help more people. Many spouses wouldn’t think of having one claim as early as possible (age 62), and then have the other claim as late as possible (age 70). It’s not common sense unless you understand the inner workings of Social Security.

Age-Sensitive Safe Withdrawal Rate Strategy? Age Divided By 20

Should a person who retires at age 70 withdraw the same amount of money from their portfolio as someone who is age 40? You’re talking about a retirement period that is likely twice as long as the other. In an article titled The “Feel Free” Retirement Spending Strategy [pdf], Evan Inglis of Nuveen Asset Management and a fellow of the Society of Actuaries proposed a safe withdrawal strategy that adjusts for age.

To determine a safe percentage of savings to spend, just divide your age by 20 (for couples, use the younger spouse’s age). For someone who is 70 years old, it’s safe to spend 3.5 percent (70/20 = 3.5) of their savings. That is the amount one can spend over and above the amount of Social Security, pension, employment or other annuity-type income. I call this the “feel free” spending level because one can feel free to spend at this level with little worry about significantly depleting one’s savings.

You can think of this is as a lower bound. He also proposes an upper bound:

At the other end of the spectrum, divide your age by 10 to get what I call the “no more” level of spending. If one regularly spends a percentage of their savings that is close to their age divided by 10 (e.g., at age 70, 70/10 = 7.0 percent) then their available spending will almost certainly drop significantly over the years, especially after inflation is considered.

Therefore, the lower and upper bounds for a person retiring at 70 would be 3.5% and 7%. The lower and upper bounds for a person retiring at 40 would be 2% and 4%.

Note that he also admits that spending 3% of your assets each year is an even simpler rule of thumb:

Even though there are lots of things to think about, for the vast majority of people, very simple guidelines will be most useful. My simple answer to the questions “How much can I spend?” or “Do we have money enough saved?” is that if someone plans to spend less than 3 percent of their assets in a year (over and above any Social Security or other pension, annuity or employment income), then they have enough money saved and they aren’t spending too much. This is a fairly conservative estimate, but people tell me they want to be conservative with their retirement spending. They would rather feel safe than spend a lot of money, and I think that is very appropriate in our current economic environment.

Another idea to add to your knowledge banks. Basically, if you are young you have to be sensitive about permanently damaging your portfolio early on with the double-whammy of negative returns and high spending.

Others will say that you should spend more when you’re young, as you’ll be able to enjoy it more. That may be true if you have long-term care insurance. I know lots of people who are still quite active and traveling at 70. I’m also at that age where I have checked out some of those “nice” assisted-living facilities for my parents, and they cost serious bucks.

My Money Blog Portfolio Income – June 2018

dividendmono225When it comes to making your portfolio last a lifetime, you may be surprised at how long that might be. According to this Vanguard longevity tool, for a couple both age 40 today, there is a 50% chance that one will live to 88. That’s 48 years.

For a young person making a plan to reach financial independence at a very early age (under 50), I think using a 3% withdrawal rate is a reasonable rule of thumb. For someone retiring at a more traditional age (closer to 65), I think 4% is a reasonable rule of thumb.

In addition, I track the dividend yield of my portfolio. This is not necessarily my spending target, but more of a very safe benchmark number. Having lived through a crisis like 2008, I know that it can be hard to appreciate “very safe” things until the poo hits the fan. The analogy I fall back on is owning a rental property. If you are reliably getting rent checks that increase with inflation, you can sit back calmly and ignore what the house might sell for on the open market.

Specifically, I track the “TTM Yield” or “12 Mo. Yield” from Morningstar, which the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. I like this measure because it is based on historical distributions and not a forecast. Below is a very close approximation of my most recent portfolio update (66% stocks and 34% bonds).

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 6/11/18) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
25% 1.69% 0.42%
US Small Value
Vanguard Small-Cap Value ETF (VBR)
5% 1.82% 0.09%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
25% 2.75% 0.69%
Emerging Markets
Vanguard Emerging Markets ETF (VWO)
5% 2.42% 0.12%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 3.48% 0.21%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX)
17% 2.86% 0.49%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
17% 2.64% 0.45%
Totals 100% 2.47%

 

Our overall plan is still based on a 3% withdrawal rate. This calculation tells us that 2.5% will come out as income “naturally”, and we would have to take the remaining 0.5% by selling shares. Living off a portfolio is an area of ongoing debate, so don’t let anyone convince you that there is a “right” answer. I’m not a financial firm convincing you to let me handle your money. I’m not here to pitch you an easily-achievable dream lifestyle. Even if you run a bunch of numbers looking back to 1920, that’s still trying to use 100 years of history to forecast 50 years into the future.

Your life is not a Monte Carlo simulation, and you need a plan to ride out the rough times. We are a real 40-year-old couple with three young kids, and this money has to last us a lifetime (without stomach ulcers). Michael Pollan says that you can sum up his eating advice as “Eat food, not too much, mostly plants.” You can sum up my thoughts on portfolio income as “Spend mostly dividends and interest. Don’t eat too much principal.”

How to Retire Happy, Wild, and Free (Book Notes)

retirehappy

After finishing the book How to Retire Happy, Wild, and Free by Ernie Zelinski, I am surprised at how unique it is. After all these years, this may be the first book I’ve read that directly explores the non-financial aspects of retirement. There are no historical rates of return, compound interest charts, or income strategies. Consider:

  • How will you create meaning in your life?
  • What activities will you keep your mind and body in top shape?
  • Who will you spend your time with?
  • What kind of environment do you want to surround yourself?

I’ve already written about two interesting points inside: Listing 10 activities you’d like to do in retirement, and the differences between a retirement activity and a job. Here are the rest of my book notes.

On going back to some form of paid work after official retirement:

A research study released in 2001 by Cornell University psychologists found that, particularly for men, employment after official retirement is beneficial for their psychological wellbeing. Those who retire from their primary career, but then find some sort of other work, are the happiest and suffer the least depression. Surprisingly, the researchers didn’t find much difference for women who go back to work after retiring versus those who don’t. No reasons were given for this important difference between the sexes.

On separating yourself from your job:

Many professionals miss their personal career space and some have been known to rent office space after they have retired to maintain their routine and sense of importance. They’ll tell their friends “Call me at the office,” just so they have a place to go.

For most of us, who we are, is based on what we do. If we become too dependent on this mind-set and our job ends, we lose our sense of identity. So before, or soon after retirement, we need to redefine who we are in a positive and meaningful way. Recycle yourself.

To help with this separation, try listing your five best traits that have nothing to do with work. Here are some possible examples:

ambitious
well-organized
hard-working
creative
kind
passionate
generous
joyful
loving
spontaneous
connected to others
good sense of humor
peaceful
inner happiness
spiritual

On figuring out how to spend your time instead of work. Ask yourself these questions:

  • What gift do I give naturally to others?
  • What gift do I most enjoy giving to others?
  • What gift have I most often given to others?

Some people don’t need any help in this area. They are ready to sail around the world, then bike around the world in reverse, and so on.

However, many others do need some help creating a fulfilling retirement. This book can help. Perhaps you keep on working because you can’t imagine retirement, or you have already retired but find yourself in a funk. The initial “I’m finally freeeeeeeee!!” has worn off. You might even be a little depressed from the social isolation or lack of structure in your life. This book can help.

Personal Capital Review 2018: Automatically Track Net Worth and Portfolio Asset Allocation

pc1

Updated 2018. Personal Capital is free financial website and app that links all of your accounts to track your spending via bank and credit cards, investments, and net worth. You provide your login information, and they pull in the information for you automatically so you don’t have to type in your passwords every day on 7 different websites. Personal Capital’s strength is in investments, including portfolio tracking, performance benchmarking, and asset allocation analysis.

Net worth. You can add your home value, mortgage, checking/savings accounts, CDs, credit cards, brokerage, 401(k), and even stock options to build your customized Net Worth chart. You can also add investments manually if you’d prefer. I have a habit of accumulating bank and credit union accounts, so I find account aggregation quite helpful.

Cash flow. The Cash Flow section tracks your income and expenses by pulling in data from your bank accounts and credit cards. This chart compares where you are this month against the same time last month. If you hate budgeting, you may find it easier to view a real-time snapshot of your spending behavior. Their expense categorization tool is pretty accurate, and if it isn’t you can change it manually. However, it isn’t quite as advanced as Mint.com, where you for example you can make a rule to always classify “Time Warner Cable” as “Utilities” and not “Online Services”.

Portfolio. This is where Personal Capital is better than many competing services, by analyzing my overall asset allocation, holdings, and performance relative to benchmarks. If you’re like me, you have investments spread across multiple custodians. I now have investments at Vanguard, Fidelity (401k), Schwab, TransAmerica (401k), and Merrill Edge. It’s nice to be able to see everything together in one picture. They can also analyze your retirement accounts fees to see if you are quietly getting charged too much.

For comparison, Mint did not allow manual input of investments and it did not break down my asset allocation correctly based on my linked accounts. In fact, all it shows is a big orange pie chart with “99.9% Not Sure” and “0.00 Other”.

Personal Capital considers the major asset classes to be US stocks, International stocks, US Bonds, International Bonds, and Cash. The “Alternatives” classification includes Real Estate, Gold, Energy, and Commodities.

If you have one bank account, one credit card, and a 401(k), you may not need this type of account aggregation service. Life tends to get messy though, and this helps me maintain a high-level “big picture” view of things.

Security. As with most similar services, Personal Capital claims bank-level, military-grade security like AES 256-bit encryption. The background account data retrieval is run by Envestnet/Yodlee, which partners with other major financial institutions like Bank of America, Vanguard, and Morgan Stanley. Before you can access your account on any new device, you’ll receive an automated phone call, email, or SMS asking to confirm your identity. Their smartphone apps are compatible with Touch ID/Face ID on Apple and mobile PINs on Android devices.

In terms of the big picture, my opinion is that by making it more convenient, I am able to keep a closer eye on all my account and thus actually make myself less likely to be affected by a security issue.

How is this free? How does Personal Capital make money? Notice the lack of ads. Personal Capital makes money via an optional paid financial advisory service, and they are using this as a way to introduce themselves. (People who sign up for portfolio trackers tend to have money to manage…) They are a hybrid advisor, combining their online tools with real human access. Their management fees are 0.89% annually for the first $1 million, with slightly lowered pricing as you go past $1 million in assets. As an SEC-registered RIA fiduciary that now manages over $7 billion, I think this improves their credibility as a company built to handle sensitive information.

Note that if you give them your phone number, they will call you to offer a free financial consultation. If you answer the phone or e-mail them that you don’t want to be contacted anymore, they will honor that request. Or you could ask them your hardest financial question and see how they respond. However, if you simply ignore the phone calls, they will keep calling. Now, you can keep using the portfolio software for free no matter what happens. But, if you aren’t interested, I would highly recommend simply being upfront with them. A simple “no thank you” and you’re good.

If you’re upfront with them, they’ll be upfront with you. I’m still a DIY guy when it comes to my money, and they have been happy to keep monitoring my accounts for free, without any additional phone calls over the last 5 years.

Bottom line. It’s not what you make, it’s what you keep that counts. The free financial dashboard software by Personal Capital helps you track your net worth, cash flow, and investments. I recommend it for tracking stock and mutual fund investments spread across different accounts. I’d link your accounts on the desktop site, but interact daily through their Android/iPhone/iPad apps for optimal convenience (log in with Touch ID or mobile-only PIN).

Motivation: Take Advantage Of Being 29, 39, 49, or 59 Years Old

40greatI’m turning 40 years old this summer. This number has always been a psychological marker for me. I’ve always wanted to be financially secure and have started a family by age 40. According to this Atlantic article by Daniel Pink*, I’m far from the only one. Consider marathons:

Four people in four different professions living in four different parts of the world, all united by the common quest to run 26.2 miles. But something else links these runners and legions of other first-time marathoners. Red Hong Yi ran her first marathon when she was 29 years old. Jeremy Medding ran his when he was 39. Cindy Bishop ran her first marathon at age 49, Andy Morozovsky at age 59.

All four of them were what the social psychologists Adam Alter and Hal Hershfield call “nine-enders,” people in the last year of a life decade. They each pushed themselves to do something at ages 29, 39, 49, and 59 that they didn’t do, didn’t even consider, at ages 28, 38, 48, and 58—and didn’t do again when they turned 30, 40, 50, or 60.

The article contains several other insights that definitely applied to me. According to Alter and Hershfield:

“People are more apt to evaluate their lives as a chronological decade ends than they are at other times,” Alter and Hershfield explain. “Nine-enders are particularly preoccupied with aging and meaningfulness, which is linked to a rise in behaviors that suggest a search for or crisis of meaning.”

According to psychologist Clark Hull:

At the beginning of a pursuit, we’re generally more motivated by how far we’ve progressed; at the end, we’re generally more energized by trying to close the small gap that remains.

You could tell yourself that being 29 is no different than being 28 or 30, or you can just use this behavioral quirk to reach your goals. I’ve been working on “closing the gap” in terms of getting all my financial affairs in order. Here are all the things that I’ve been working on as a 39-year-old:

  • Created a system to simulate a monthly “paycheck” so that things run smoothly and the bill gets paid even if I am not around to micromanage things (like I usually do). Dividends and interest flow to the emergency fund/cash buffer (savings account), which then automatically transfers a set amount each month to our day-to-day checking account.
  • Beefed up our cash buffer. As part of the above-mentioned system, I increased our cash hoard to two years of expenses in FDIC-insured savings accounts and CDs. The idea is that this buffer “bucket” feeds the checking account, but also gets replenished by income and interest from our portfolio. As larger upfront expenses like a home repair or used car purchase comes up, the buffer can take a hit. The dividends come in quarterly spurts. The buffer allows us to handle shocks without disruption.
  • Re-examined term life insurance. We are currently 10 years into a 30-year term policy with a level premium. We technically don’t need to replace any lost income anymore, so we considered canceling this policy. However, we decided that if something were to happen to one of us, we would still need to pay someone to replace childcare duties for three children. I don’t know how other single parents do it, but I know that I’d need help!
  • Moved some missing assets into revocable living trusts for estate planning purposes. When we created this trust, we were mostly concerned about having a plan in place to take care of the children in case something happened to both of us. After you create a trust, you must manually move/retitle all your various brokerage accounts into it, and the paperwork can be a pain.
  • Consolidated accounts. I still have a penchant for collecting new financial accounts, but I’ve also closed a bunch this year. Our grandparents used to hide money in jars around the house. I like to buy shares of Berkshire (BRK) and put them in brokerage accounts (often involving a bonus, and BRK gives off no dividends to worry about at tax time). I started over a decade ago with Sharebuilder (now Capital One Investing) and most recently got $5 worth from Stash.
  • Bought a used 2015 Toyota minivan so that we have a reliable family vehicle for the next 10 years. I love sliding doors. I hate the inconvenience of a car breakdown.
  • Started and put some money into a 529 plan for each kid. The amount isn’t enough to cover four years of college, we’ll just have to see how much it can grow as compared to tuition. I read somewhere that you should plan to save 1/3rd, fund 1/3rd from annual income, and leave the last 1/3rd for scholarships, grants, or student loans.

Everything on this list was being putting off because it was unpleasant. Most either dealt with the prospect of early death/severe disability, or annoying paperwork. The prospect of turning 40 got me over the hump. Next decade: Marathon at age 49?

* The article is actually an excerpt from his new book When: The Scientific Secrets of Perfect Timing.

Why Pursue Financial Freedom: Fulfilling Retirement Activity vs. Ideal Job

retirehappy

How to Retire Happy, Wild, and Free by Ernie Zelinski continues to offer smart observations on retirement. For example, when people are working, their idea of leisure is often passive: watching TV, listening to music, shopping, or eating at restaurants. However, in retirement, they need to replace all the intangibles besides money that working provided.

The Academy of Leisure Sciences has 8 criteria for finding a good leisure activity in retirement:

  1. You have a genuine interest in it.
  2. It is challenging.
  3. There is some sense of accomplishment associated with completing only a portion of it.
  4. It has many aspects to it so that it doesn’t become boring.
  5. It helps you develop some skill.
  6. You can get so immersed in it that you lose the sense of time.
  7. It provides you with a sense of self-development.
  8. It doesn’t cost too much.

Did you know even know the Academy of Leisure Sciences existed? Another new tidbit from this book.

My observation is that these are also same characteristics of a good job. Think of your own job and read it again:

  1. You have a genuine interest in it.
  2. It is challenging.
  3. There is some sense of accomplishment associated with completing only a portion of it.
  4. It has many aspects to it so that it doesn’t become boring.
  5. It helps you develop some skill.
  6. You can get so immersed in it that you lose the sense of time.
  7. It provides you with a sense of self-development.
  8. It pays enough to support your lifestyle.

Of course, this brings you to why saving up money to reach financial freedom is a worthy pursuit. The list of things that satisfies the top 8 leisure criteria should be pretty long. It might take a few tries to find something that fits, but you could play any sport, learn to cook, speak a new language, and so on.

However, adding the criteria that it has to pay you makes the list much shorter, perhaps non-existent. Compare picking up cycling for personal enjoyment vs. getting paid as a professional cyclist. Learning how to smoke some decent backyard BBQ vs. getting paid as a professional caterer. Start to speak a new language vs. becoming an (adequately-paid) French teacher. I’m sure some lucky people out there really do have a perfect job where they are getting paid for something that they would “do for free”. However, most of us don’t, so that’s where financial freedom comes in to remove that money requirement.

Non-Financial Retirement Planning: List 10 Retired Activities

retirehappyEver notice that every book on “How to Retire” is really just about how to accumulate a big pile of money? I’m currently in the middle of How to Retire Happy, Wild, and Free by Ernie Zelinski, which contains absolutely nothing about mutual funds, real estate, or safe withdrawal rates. Instead, it deals with the non-financial aspects of retirement. What does that mean? Well, many retirees spend at least some time being quite unhappy. They haven’t solved the other retirement problems:

  • How will you create meaning for yourself?
  • What activities will you keep your mind and body in top shape?
  • Who will you spend your time with?
  • Where is the best environment to live?

A recommended exercise is to write down the 10 favorite interests and activities that you would like to pursue in retirement. At the same time, write down how much time you are presently spending on these activities. If you are not spending any time pursuing these activities before retirement, the experts say that you are unlikely that you will spend much time on these activities after you quit work. Many people are surprised when their retirement is completely different from they imagined. They may become bored, aimless, lonely, and/or depressed. A surprisingly large number go back to work!

You need to develop activities as part of your retirement planning, BEFORE you retire. Here’s my list of favorite activities, along with time currently spent.

  1. Time with kids. Chasing bugs and jumping in muddy puddles. Learning new things with them. (Almost enough)
  2. Cooking at home. Becoming a better cook. Know what I’m eating. (4-6 hours a week)
  3. Time with spouse. Enjoying their company. (Not nearly enough)
  4. Play tennis. Social interaction and physical exercise. (3-6 hours a week)
  5. Keep learning about investing and finance. (Enough)
  6. Entertain friends at house. Cook for them. Socialize. (Very little)
  7. Read books. (2-3 hours a week? A little each day)
  8. Build an off-grid shed. Power from solar PV. Tinker with batteries and wind turbines for fun. Water catchment. Composting toilets? (None)
  9. Raise fish and/or chickens. I like to read about chicken tractors and backyard fish farms. (None)
  10. Travel. So much left to see out there. (Few weeks a year)

Right now, most of our non-work time is spent on toddler childcare, so many of these activities are being neglected. This list is a good reminder that I need to work harder on maintaining good relationships my wife, family, and friends. Once all the kids are in pre/school, we’ll see if I actually get around to the rest. Maybe the experts are right and I’ll never build that self-sustaining tilapia farm…