The Lifestyle Secrets of Okinawan Centenarians

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CNN has a new series called “Chasing Life with Dr. Sanjay Gupta”, and its first episode examines the lifestyles of the impressive centenarians of Okinawa, Japan.

Nearly two-thirds of the residents of Okinawa are still functioning independently at age 97. That meant they were in their own homes, cooking their own meals and living their lives fully — at nearly 100 years old!

Here are three factors noted in the show:

Ikigai. This means having a sense of purpose in life. Gupta says that one way to figure this out is to first imagine that you no longer needed to do anything for money. In that case, what would you regret not doing with your life? What do you love, and what does the world need?

ikigai

Here is a previous post on Ikigai – Finding Your “Reason For Being”. I have noticed that many people who seek out financial independence feel something “wrong” about their current trade-your-life-for-money environment. They are not living a life aligned with their “ikigai”.

Moai. This means having a social group within the community that has common interests and can provide both financial and emotional support. Family is important, but this appears to be an additional support system. This social component of longevity is critical and should not be overlooked.

Hara hachi bu. This means that you should stop eating when you are 80% full (and thus still a little bit hungry). People in Okinawa eat fewer calories in general, and the calories that they do eat tend to come from sweet potatoes, soybeans (legumes), a variety of vegetables, and only a little meat.

Okinawans centarians have also been examined in the book Blue Zones: 9 Lessons for Living Longer From the People Who’ve Lived the Longest (which I have not yet read). Here is another Venn diagram from the Wikipedia entry that shows the common characteristics between Okinawa and two other Blue Zones (Loma Linda, USA and Sardinia, Italy).

Bottom line. It’s not just living for a long time, but it’s living an active, engaged, happy life for a long time. You won’t get this by taking the right pills from orange bottles. You need to spend your time doing something that you feel matters to the world. You need love and support from other humans. You need to eat natural foods, but not too much.

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Charlie Munger CNBC Interview 2019 Full Video, Full Transcript, and Notes

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Here’s another Charles T. Munger interview (last one for a while, I promise!) for those of you that share a peculiar fondness for hearing someone encourage rationality, patience, and self-discipline. After the Daily Journal 2019 annual meeting, Munger did a 30-minute interview with Becky Quick of CNBC. (See similar Buffett CNBC interview.) I guess they forgave Munger’s jabs at Jim Cramer, as they posted the entire interview online along with a full transcript.

I’m going to be honest, I didn’t get as many gems out of this interview as some of his other stuff. Here was my favorite part.

The secrets to life can also fit on an index card? As Munger noted earlier, “If it’s trite, it’s right”. We’ve seen personal finance advice fit on an index card, so why not life advice as well?

BECKY QUICK: Charlie, so many of the people who come here come because they’re looking for advice not on business or investments as much as they’re looking for just advice on life. There were a lot of questions today, people trying to figure out what the secret to life is, to a long and happy life. And– and I just wonder, if you were–

CHARLIE MUNGER: Now that is easy, because it’s so simple.

BECKY QUICK: What is it?

CHARLIE MUNGER: You don’t have a lot of envy, you don’t have a lot of resentment, you don’t overspend your income, you stay cheerful in spite of your troubles. You deal with reliable people and you do what you’re supposed to do. And all these simple rules work so well to make your life better. And they’re so trite.

BECKY QUICK: How old were you when you figured this out?

CHARLIE MUNGER: About seven. I could tell that some of my older people were a little bonkers. I’ve always been able to recognize that other people were a little bonkers. And it helped me because there’s so much irrationality in the world. And I’ve been thinking about it for a long time, its causes and its preventions, and so forth, that I– sure it’s helped me.

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Charlie Munger Daily Journal Annual Meeting 2019 Full Video, Full Transcript, and Notes

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If you like hearing Warren Buffett and Charlie Munger talk at the Berkshire Hathaway (BRK) annual meeting, you should also watch or listen to Charlie Munger at the Daily Journal (DJCO) annual meeting. DJCO is his personal pet project, and I feel like he lets loose more at this meeting than at BRK. For 2019, CNBC broadcast the entire 2-hour Q&A session online. Latticework Investing generously shares a full transcript as well. I choose to listen to this over any finance-related podcast.

Here are my personal notes and highlights:

Think for yourself.

[…] my definition of being properly educated is being right when the professor is wrong. Anybody can spit back what the professor tells you. The trick is to know when he’s right and when he’s wrong. That’s the properly educated person.

Index funds have become more and more successful for a simple reason. The evidence is getting stronger over time that they provide better long-term performance due to lower costs and better tax-effeciency.

Another issue of course that’s happened in the world of stock picking, where all this money and effort goes into trying to be rational, is that we’ve had a really horrible thing happen to the investment counseling class. And that is these index funds have come along and they basically beat everybody. And not only that, the amount by which they beat everybody is roughly the amount of cost of running the operation and making the changes in investments. So you have a whole profession that is basically being paid for accomplishing practically nothing. This is very peculiar. This is not the case with bowel surgery or even the criminal defense bar in the law or something. They have a whole profession where the chosen activity they’ve selected they can’t do anything.

[…] I don’t have any solution for this problem. I do think that index investing, if everybody did it won’t work. But for another considerable period, index investing is going to work better than active stock picking where you try and know a lot.

If you are trying to beat the indexes, you need LESS diversification, not more. Wait for a few fat pitches and don’t hesitate to swing. This isn’t as widely known, but Munger’s personal portfolio is roughly 1/3rd Berkshire Hathaway stock, 1/3rd Costco stock, and 1/3rd invested in Li Lu, an investment manager based in China.

But the whole trick of the game is to have a few times when you know that something is better than average and to invest only where you have that extra knowledge. And then if you get just a few opportunities that’s enough. What the hell do you care if you own three securities and J.P. Morgan Chase owns a hundred? What’s wrong with owning a few securities?

[…] So the whole idea of diversification when you’re looking for excellence, is totally ridiculous. It doesn’t work. It gives you an impossible task.

Now at a place like Berkshire Hathaway or even the Daily Journal, we’ve done better than average. And now there’s a question, why has that happened? Why has that happened? And the answer is pretty simple. We tried to do less. We never had the illusion we could just hire a bunch of bright young people and they would know more than anybody about canned soup and aerospace and utilities and so on and so on and so on. We never had that dream. We never thought we could get really useful information on all subjects like Jim Cramer pretends to have. (laughter) We always realized that if we worked very hard we can find a few things where we were right. And that a few things were enough. And that that was a reasonable expectation.

Avoid any pitches that promise easy money from stock-picking. Penny stocks, day-trading, trends, charts. All of them.

Then if you take the modern world where people are trying to teach you how to come in and trade actively in stocks. Well I regard that as roughly equivalent to trying to induce a bunch of young people to start off on heroin. It is really stupid. And when you’re already rich to make your money by encouraging people to get rich by trading? And then there are people on the TV, another wonderful place, and they say, “I have this book that will teach you how to make 300 percent a year. All you have to do is pay for shipping and I will mail it to you!” (laughter) How likely is it that a person who suddenly found a way to make 300 percent a year would be trying to sell books on the internet to you! (laughter) It’s ridiculous.

Have modest expectations in stock market returns.

Well, my advice for a seeker of compound interest that works ideally is to reduce your expectations. Because I think it’s going to be tougher for a while. And it helps to have realistic expectations. Makes you less crazy. I think that…you know they say that common stocks from the aftermath of the Great Depression, which was the worst in the English speaking world in hundreds of years, to the present time may be an index that’s produced 10 percent. Well that’s pre-inflation. After inflation it may be 7 percent or something. And the difference between 7 and 10 in terms of its consequences are just hugely dramatic over that long period of time. And if that’s 7 in real terms, but achieved starting at a perfect period and through the greatest boom in history, starting now it could well be 3 percent or 2 percent in real terms. It’s not unthinkable you’d have 5 percent returns and 3 percent inflation or some ghastly consequences like that. The ideal way to cope with that is to say, “If that happens, I can have a happy life.”

Be very careful about who you chose to partner up with in your life.

We all know people that are out married, I mean their spouses are so much better. Think of what a good decision that was for them. And what a lucky decision. Way more important than money. A lot of them did it when they were young, they just stumbled into it. Now you don’t have to stumble into it, you can be very careful. A lot of people are wearing signs, “Danger. Danger. Do not touch.” And people just charged right ahead. (laughter) That’s a mistake. Well you can laugh but it’s still a horrible mistake.

On becoming rich.

This business of controlling the costs and living simply, that was the secret. Warren and I had tiny little bits of money. We always underspent our incomes and invested. And if you live long enough you end up rich. It’s not very complicated.

“If it’s trite it’s right.”

I think personal discipline, personal morality, good colleagues, good ideas, all the simple stuff. I’d say, if you want to carry one message from Charlie Munger it’s this, “If it’s trite it’s right.” All those old virtues, they all work.

My general idea is there’s no point in fretting too much about what you can’t fix. It’s a big mistake to fill yourself with resentments and hatreds and so on. It’s such a simple idea but so many people ruin their lives unnecessarily. Envy is such a stupid thing to have because you can’t possibly have any fun with that particular sin. Who in the hell ever had any fun in envy? What good could envy possibly do for you? And somebody is always going to be doing better than you are. It’s really stupid. So my system at life is to figure out what’s really stupid and avoid it. It doesn’t make me popular, but it prevents a lot of trouble.

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Thank You, John C. Bogle

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Vanguard announced on January 16, 2019 that its founder, John C. Bogle, passed away on at his home in Bryn Mawr, Pennsylvania at 89 years old. There will no doubt be many tributes; here are a few same-day articles from WSJ, Bloomberg, Reuters, and great tweet from Morgan Housel.

Jack Bogle was a champion of thrift, simplicity, and keeping investing costs low. While he reached the popularity level where people would write entire columns about “Why Bogle is Wrong about This or That”, I was always annoyed when people would pick at one little thing he said. I felt that his strongest message was that of common sense. Sometimes it took multiple readings and time, but he really offered a lot of valuable, reasoned knowledge in his books. Almost exactly a year ago, I wrote about my Jack Bogle Appreciation curve:

boglecurve

My first mutual fund investment was in the Janus Mercury fund in the very early 2000s. I was chasing performance and Morningstar ratings, and the fund was actively managed with high turnover and high expenses. Thanks to reading his books, my subsequent investments were in low-cost Vanguard funds that were available to a DIY investor. You can now buy ultra-cheap commission-free ETFs from nearly every brokerage account. New investors may take this for granted, but I’m old enough to remember that this was not always the case! This was solely due to Vanguard’s success:

vanguardbarr

He created a unique structure where the unnecessary “Helper” fees stayed in the pockets of the people who invested with Vanguard (and indirectly anyone who invests in a low-cost index fund today). This has resulted in an estimated $1 trillion saved by average everyday investors.

Today, my family is financially secure and we have a pretty clear plan for the future as well. The majority of my net worth is held at Vanguard. My life was materially improved by a man that I never got the honor to meet. The best I could do was to win a personally-signed book from a charity auction for his foundation.

Thank you, Mr. Bogle. I will try my best to heed your advice.

p.s. If you do not know that I am talking about, please do yourself a favor and read The Little Book of Common Sense Investing from the library or buy a copy. It is very short and a good place to start.

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Wild Book: What Do You Plan To Do With Your One Wild and Precious Life?

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I’ve been catching up on some memoirs and recently finished Wild by Cheryl Strayed. (I haven’t seen the movie.) I mention it here because the author did a “Big Awesome Thing” in hiking the Pacific Crest Trail and I think achieving financial freedom is also a “Big Awesome Thing”. I thought – What makes a person able to accomplish a “Big Awesome Thing”?

First, instead of rehashing another plot summary for the book, I’ll steal the blurb from Amazon:

At twenty-two, Cheryl Strayed thought she had lost everything. In the wake of her mother’s death, her family scattered and her own marriage was soon destroyed. Four years later, with nothing more to lose, she made the most impulsive decision of her life. With no experience or training, driven only by blind will, she would hike more than a thousand miles of the Pacific Crest Trail from the Mojave Desert through California and Oregon to Washington State—and she would do it alone. Told with suspense and style, sparkling with warmth and humor, Wild powerfully captures the terrors and pleasures of one young woman forging ahead against all odds on a journey that maddened, strengthened, and ultimately healed her.

Cheryl Strayed father also left her when she was young. An excerpt from the book:

The father’s job is to teach his children how to be warriors, to give them the confidence to get on the horse and ride into battle when it’s necessary to do so. If you don’t get that from your father, you have to teach yourself.

In my opinion, the lack of a strong father figure and the early death of her mother left her without the support or belief that she had power over her own life. But by pushing herself to do this seemingly random but difficult task and overcoming many obstacles along the way, she discovered that she did have that power inside. Perhaps each person is drawn to a different “Big Awesome Thing” that can be the first stepping stone to a life lived consciously. Hers was being free in the wild:

It had only to do with how it felt to be in the wild. With what it was like to walk for miles for no reason other than to witness the accumulation of trees and meadows, mountains and deserts, streams and rocks, rivers and grasses, sunrises and sunsets. The experience was powerful and fundamental. It seemed to me that it had always felt like this to be a human in the wild, and as long as the wild existed it would always feel this way.

After that, Strayed could attain happiness and fulfillment because she had the belief that she could change her own circumstances. Her actions mattered. It was worth trying, taking that risk to make your life better. I fear that many others have lost that self-belief and thus don’t even try.

I enjoyed the following excerpt from a poem that was included in the book – “The Summer Day” by Mary Oliver.

Tell me, what is it you plan to do
with your one wild and precious life?

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Shel Silverstein “The Voice” and Financial Freedom

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I remember being both amused and confused by Shel Silverstein’s poems as a kid. When I read them again today to my own kids, my reaction is mostly the same, except some of them are even darker than I remember!

I ran across a Fatherly roundup of inspirational quotes from Silverstein and really enjoyed this one called “The Voice” from his newer book Falling Up:

There is a voice inside of you
That whispers all day long,
“I feel this is right for me,
I know that this is wrong.”
No teacher, preacher, parent, friend
Or wise man can decide
What’s right for you–just listen to
The voice that speaks inside.

For me, after shock-proofing, the path to financial freedom was all about finding alignment with this voice. I’m still working on it, but there is less of an inner struggle when you’re not also stressed about how to fix the heater and also cover the rent due next week.

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Good Luck or Bad Luck? Maybe, It’s Hard To Tell

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Reading children’s books to my kids has become a regular source of new wisdom. I guess that’s not surprising, if the goal is to teach kids about life. Here’s one that came across recently and keeps popping back in my head.

I first read it in the children’s book Zen Shorts by Jon J. Muth (Caldecott Honor book). There are many variations of it online, and it may be credited as a Chinese, Buddhist, Taoist, or Zen parable. Here’s a brief version from Daily Zen:

There is a Taoist story of an old farmer who had worked his crops for many years. One day his horse ran away. Upon hearing the news, his neighbors came to visit. “Such bad luck,” they said sympathetically. “Maybe,” the farmer replied.

The next morning the horse returned, bringing with it three other wild horses. “How wonderful,” the neighbors exclaimed. “Maybe,” replied the old man.

The following day, his son tried to ride one of the untamed horses, was thrown, and broke his leg. The neighbors again came to offer their sympathy on his misfortune. “Maybe,” answered the farmer.

The day after, military officials came to the village to draft young men into the army. Seeing that the son’s leg was broken, they passed him by. The neighbors congratulated the farmer on how well things had turned out. “Maybe,” said the farmer.

I enjoy the sound of Alan Watts’ voice, so I am also embedding this YouTube version:

I still have a hard time applying this parable in real-time, but it does help me after some time passes. This parable is also tricky because you have to remember both when life puts up a roadblock and when you receive an unexpected windfall.

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NYT Financial Tuneup Day 4: Retirement

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nyt_ftuDay 4 of the NY Times 7-Day Financial Tuneup is about retirement. (Sign up for your own personalized tune-up here.) This assumes you are eligible for a 401(k) or similar retirement plan. The key action point is bumping up your retirement contribution rate by 1% and perhaps adjusting your asset allocation if necessary. Here’s a simple chart showing you why:

nyt_tuneup_ret1

If you’re making $50,000 annually and contributing 5 percent of your salary to your retirement account, assuming an annual return of 6 percent and a 3 percent annual salary increase, in 25 years, you will have about $198,000 in your retirement account. If you start to increase that percentage by 1 percentage point annually however, you will have over $550,000 in that same account in 25 years. By increasing the amount you save by 1 percentage point each year, you’ll save an extra $354,940 for retirement.

Increase Your Savings

  • Log into your retirement savings account. (Baby steps…)
  • Increase the amount of money taken out of your paycheck by 1 percentage point annually. Also check to see if you are taking full advantage of any company match.
  • Make it automatic. If you have the option, set it to automatically escalate in the future.

Rebalance Your Account

  • Log into your retirement savings account.
  • Determine how you should rebalance your account. What is your target asset allocation? Here’s mine but it’s probably more complicated than most people need. Consider a target-date fund, especially if it is a low-cost, passive version. Fidelity, Vanguard, and Schwab all have solid versions. I put my own mom in the Vanguard one.
  • Make it automatic. If you have the option, set it to automatically escalate in the future. My provider calls it “Auto-Increase”.
  • Rebalance your account. Basically, make sure your portfolio is still what you want it to be, as it may have shifted over time. You only need to do this once or twice a year, or you can set “bands” to rebalance when things get too out of whack.

Action, action, action. This move won’t make you save enough for retirement by itself, but it’s something tangible. If you are really going for financial freedom, you should use this as a platform to do even more. We have our 401k savings rate already set at 60% (max allowed by one provider) since we are working part-time (“semi-retired” sounds better!) with a lower income but still want get as close to the annual 401k limits as possible.

Financial Tuneup Recap (still in progress)

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Ikigai – Finding Your “Reason For Being”

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ikigai

I stumbled across the concept of ikigai in Japanese culture – loosely translated as “reason for being” – in this Medium post. The Venn diagram above appears to be taken from this Toronto Star article (which is based on another work, and so on…). The graphic suggests that we asks ourselves these questions to find our ikigai:

  • What do you love?
  • What are you good at?
  • What does the world need from you?
  • What can you get paid for?

In other words, Ikagai is not just your passion or something that makes you happy. I searched for deeper explanations and found this BBC article with the most satisfying one:

Ikigai is what allows you to look forward to the future even if you’re miserable right now.

I was reminded of this previously-mentioned Venn diagram by Bud Caddell regarding finding the right job:

caddell620

In essence, the question “What does the world need from you?” is collapsed into “What can you get paid for?” above. If you’re looking for the ideal job, then I suppose that is a good shortcut.

However, not everyone’s reason for waking up every morning involves money. The BBC article cites a 2010 survey of 2,000 Japanese men and women where just 31% of participants cited work as their ikigai. That means for 69% of Japanese people, their ikigai is something else. Family, friends, community, a hobby, a volunteer position.

Food for thought.

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NYT Financial Tuneup Day 2: Trim Your Budget

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nyt_ftuDay 2 of my NY Times 7-Day Financial Tuneup is called Trim Your Budget. The key here is to take action, not just do research and then put it off again. (If you just want to daydream, Day 1 was Optimize Your Thinking.) Again, the NYT doesn’t have direct links, but anyone with a (free) NYT account can get their own personalized list of tasks.

Reviewing your monthly budget annually is a simple way to keep your spending in check. Don’t worry, we’re not going to ask you to cut anything you love, just to trim your spending in places you may not even notice. After all, if you benefit from your weekly yoga class or truly enjoy your restaurant night, have at it. Just be honest with yourself about the services that you truly use and enjoy. In comparison, if you have a languishing gym membership you never use, it may be time to cut that $50-a-month membership fee.

Round 1: Find an Easy Item to Cut

  1. Gather your credit card and checking account statements from the last month.
  2. List your spending. “…list any expense from the last month that occurs routinely: daily, weekly, monthly. From the cup of coffee you buy every morning, to your weekly manicure, to your monthly gym membership or magazine subscription.”
  3. Find an easy place to trim. “…most commonly-cut expenses are subscriptions to gyms, credit bureaus, newspapers and audio services.”

Here is rundown of recurring expenses with some commentary.

  • Mortgage – thankfully paid off a few years ago.
  • Property tax – yes, but not really negotiable. I suppose I could contest the assessed value of my house, but it seems pretty reasonable.
  • Car loan – none. My measure of car affordability is whether I can pay for it with cash. I’ve paid cash on every car, from $2,000 on up to 20x that.
  • Student loan – thankfully paid off that $30,000 a while ago.
  • Insurance – feels like we have so much insurance, but they have high deductibles to protect against catastrophic events. Car, homeowners, life, long-term disability, and umbrella insurance.
  • Food/grocery/take-out/restaurants – I’m sure we could trim something, but not in a clear-cut way. No coffee shop habit.
  • TV/internet – yes, this is a target for trimming.
  • Cellular phone – Still at $6 a month with Sprint for two lines.
  • Gym – yes, just barely worth the cost.
  • Gas
  • Medical
  • Clothing, gifts, etc – yes, again I’m sure we could trim something but we are okay with it overall.
  • Charitable giving – yes, but already thoughtfully budgeted for.
  • Credit monitoring, Netflix, magazines, music streaming, etc. – I pay for Amazon Prime and feel it is worth the money. No to Netflix, Spotify, HBO, Lifelock, paid credit monitoring, etc. A few magazines at $5 or less per year.

Round 2: Lower Your Bills

  1. Pick a bill to start with
  2. Find and review your latest bill
  3. Call your service provider
  4. Ask for a reduction in your bill

The hard part: Pick up the phone and call my cable provider. I’ve done it before, but it’s never fun. This tune-up did motivate me to do it, so I suppose that’s something. I called my cable provider and after 26 minutes, I was only able to squeeze about $5 a month in concessions by having them re-arrange my bill around to a “new plan” from my “old plan”. Even that required me to get past the initial lie that my “old plan” was “already a great deal”. ($60 a year in savings is not bad for 30 minutes of time, I suppose.)

I did not go all the way to setting a cancel date, as I wanted to avoid interruption in internet service. If you are ready to cancel, see Tips on Reducing Cable and Phone Bills From Ethically Ambiguous Experts.

In the end, I called up the duopoly DSL provider to get the new customer promotion for TV and internet. I confirmed that their was no credit check required. If it all works out, switching should save me around $50 a month ($600 a year). Switching back and forth isn’t fun, but it does save money!

Financial Tuneup Recap (still in progress)

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NYT Financial Tuneup Day 1: Optimize Your Thinking

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nyt_ftuI’ve been in a “Back to Basics” mood and decided to work through the NY Times 7-Day Financial Tuneup. I don’t have direct links to each day as you need a (free) NYT account to view your personalized list of tasks. Instead, I’m quoting selected portions to illustrate the general idea. These are my answers and not a statement of what is best – each person’s situation is different but equally valid.

Day 1: Optimize Your Thinking

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What do I value?

Try to figure out why you are working so hard and worrying about your finances. After that, setting financial priorities may be simpler.

  • Spending quality time with family and friends. Being able to spend time with my children while they are still young (and want to spend time with me too). Having the opportunity to teach them things and build a good lifelong relationship. I hope to avoid the cycle where young children spend all day cared for by paid professionals, and in return the elderly are also cared for all day by paid professionals. (Selfish, I know…) I’m not against school or babysitters – I also enjoy spending one-on-one time with my spouse.
  • Having personal time to pursue my own educational goals. I also want time all to myself. I want to try things that I’m not very talented at but I still enjoy. (This means dropping work, which often means getting paid for one specialized task.) I’d like to work on residential solar PV + battery storage + water catchment systems. I still have a plenty of room to improve my cooking skills. I want to smoke my own Texas-style briskets. I took this Vanguard retirement quiz and scored mostly as a “learner”.
  • Find a way to give back. I also answered some questions as a “teacher” and “volunteer” role. I’d like to figure a way to give back to my community where I feel like I am making a tangible difference (as opposed to my current cash contribution with unknown impact). I still haven’t figured this one out.

What brings me the most joy?

Figure out the two or three things you spend money on in your life that bring you the most joy. Is it your annual vacation? Your fancy gym membership? The great apartment close to work?

  • Our house. Location was our top priority, and it is close to both work, school, and most extracurricular activities. We chose less square footage in exchange for 30-minutes less (each way) in commute time. While we managed to pay off the mortgage, it did take up a big chunk of our income for a long time. The house is older and also has higher maintenance needs.
  • Extended annual trip every summer. We chose a school schedule with traditional summer breaks (no homeschooling, no year-round school). As a result, I would like to be able to plan a longer 4-week vacation each year in a different destination. This would help to better immerse ourselves in a different world. For example, one year might be studying national parks and then going on a cross-country USA road trip in an RV. The next might be Japan and having the kids prepare by learning about Japanese culture in the months leading up.
  • Home-based DIY fun. I like DIY culture (even though I’m not especially good at anything) and simple rules like “Eat anything you want, just cook it yourself“. We don’t eat out at restaurants often, but we do cook a lot at home and sometimes buy more expensive ingredients like good cheese, vegetables, and random things that aren’t on sale. We buy nice kitchen hardware. Another similar thing we are going to try is home-based birthday parties (with 3 kids the $$$ adds up), which means we can “invest” in things like a playground/swing set, vegetable garden, and backyard movie screen. (Tree house would be a stretch goal.)

Financial Tuneup Recap (still in progress)

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401k Millionaire By Age 45: How Was It Possible?

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millWith the ongoing bull stock market, more people are reaching $1,000,000 balances in their 401k every day. However, a more extreme claim is that someone reached this mark at age 45 with total employee contributions of only $300,000. Is that really possible? Let’s take a look at what would need to fall into place for that to happen…

Consistently high contributions from salary. If you divide $300,000 by a theoretical 25 years of savings, that works out to $12,000 per year. That is within 401k historical contribution limits, but even with 25 working years, that means nearly maxing out your 401k contributions every single year. (Employer company matches don’t count and can push you above that limit.) According to Redditor Subject_Beef, s/he indeed saved regularly in 1995 with contributions close to the max most years. Consider that only about 10% of participants max out their 401ks each year, and most of those people were over the age of 45.

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High investment gains. Next, you must have the growth of $300,000 to $1,000,000, which would require a high stock allocation, avoidance of a prolonged bear market, and not panicking during market losses. Even with a lump-sum invested 25 years ago, going from $300k to $1000k would require a compound annual growth rate of 6.2%. However, with a 401(k), you have to do this through regular contributions and dollar-cost-averaging over time. Therefore, the actual growth rate would have to be significantly higher than that. By my rough calculations, the average would have to have been around 9% annually. The current asset allocation was shown to be roughly 37% S&P 500 Index fund, 33% US Small Cap Stock Index fund, and 30% International Stock Index fund. The annualized return of the S&P 500 has been about 10% over the last 23 years, so the numbers are quite possible.

No IRA rollovers. Finally, you’d need a steady career as most people who change companies either cash out or roll their 401(k) funds into an IRA with more flexibility. It is possible to do repeated 401k-to-401k rollovers, which is apparently the case here. I can’t think of too many compelling reasons to do so besides enabling the Backdoor Roth IRA. This is also why I don’t think tracking aggregate 401k balances is a good way to measure savings or wealth. People move funds out of 401ks into IRAs all the time.

Altogether, I believe this story and the numbers do check out. However, this is not a common occurrence given the factors above that have to align. The poster does mention a significant employer match that would have help increase the effective contributions above $300,000 and make it a bit more realistic for an average worker. In any case, becoming a 401(k) millionaire by age 45 is an impressive accomplishment.

“My Money Blog has partnered with CardRatings for our coverage of selected credit card products. My Money Blog and CardRatings may receive a commission from card issuers. All opinions expressed are the author’s alone, and the content has not been provided nor approved by any of the companies mentioned. Thank you for supporting this independent site.”