If you regularly follow my income reports, you know I’ve been spending a lot of time this year on a mysterious side project. So much, in fact, that it’s significantly throttled new content getting created for HYW for many months now.
Throughout this time, I’ve sometimes experienced burnout, wondering if all the work was worth it.
Looking back, it’s been a hard first half of the year. I accomplished a ton of work, but not all of it is bearing fruit yet. And it may take a long time for the side project work to become useful…there’s a chance also that it never will.
Still, I believe the work done in the first half helped to strengthen a long-term foundation of financial security for K and I and our loved ones.
I’ve been thinking a lot about that lately: financial security.
How much is enough? When can I stop trading time for money?
One major fear in retirement planning is simply not knowing how big of a financial nut you will need to actually last the rest of your life, including supporting your kids until they’re out of the house and independent.
To be sure, there’s academic research around the “4% rule.” But what ultimately matters is not aggregate statistics of the general population. It’s how big of a nut you personally actually need in your own specific case. The aggregate isn’t useful if it doesn’t work for YOU.
For me, like many others, that number may not even be knowable, because there are so many variables at play.
How many kids will I have to plan to support through college? College tuitions already make my nose want to bleed; how much will it cost in a couple decades? Could be half a million a pop!
What if a family member gets sick? Crushing medical costs are a leading cause of bankruptcy.
What if a black swan event like an earthquake destroys the house and insurance doesn’t cover it all? (In California, this possibility isn’t even remote – some say we’re already overdue for the big one.)
Then there’s politics and economics. What if taxes go way up? Inflation? What if there’s no social security or Medicare (or Medicaid) for you to count on?
What if the stock market suffers some big drops? Sure, it’ll recover eventually, but the timing may not work for you.
Not to mention lifestyle choices. What standard of living is a must have? Nice to have? What kind of lifestyle do you need to actually be happy?
What location do you want to live in? How much do you plan to travel in retirement, and to what places? How much will that cost over time?
Will you have any income streams in retirement that can offset nest egg withdrawals? How much and how often?
There’s just a ton going on that makes a truly confident assessment of how much you need really hard to predict.
So unless you have many millions stashed away, such that no matter how bad things get it’s extremely unlikely you’ll run out of money, there’s going to be uncertainty inherent in your retirement planning.
…What if you have to return to the workforce?
The other side of the coin is, suppose you miscalculated and didn’t save enough. Later in life, after realizing this, how realistic and difficult would it be to return to the workforce…in a role you could be happy with, and earning a wage you’re satisfied with?
Well, that depends on how dormant-proof your skills are. Will you have valuable skills even if you go dormant for many years? Work experience has value, but things change quickly.
I’ve worked in multiple industries – law, consulting, finance, tech – and all of them have varying degrees of “decay” where your skills start to atrophy if you don’t use them regularly.
Particularly in technology: tech and software change so freaking fast that if you’re out for just a few years, it’s pretty hard to bounce back.
Law, finance, and consulting have a little bit stickier skillsets because the skills required to be good at them are somewhat longer-lasting: general analytical skills, communication skills, and persuasive skills.
In fact, I think the only lasting skills that don’t really ever change are: (1) really strong communication skills, and (2) really compelling leadership/persuasive and managerial skills.
Still, even those professional services industries must adapt to the needs of their clients, and clients across the board have been tooling up on tech expertise in recent years – and increasingly demand their lawyers, consultants, and investors do the same. But it’s hard to do that if you’re not actually doing the job.
Right now, I have pretty strong technical and analytical skills, but in retirement my worry is those skills may atrophy quickly. Even though I also have good skills when it comes to problem solving and getting things done in an organization, those skills are like strength training: you have to keep working the muscle for it to stay strong. If you take a long break, like retirement, muscles get flabby. And getting back in shape is a lot harder when you’re 50 than when you’re 25.
That kind of scares the bejeezus out of me.
I want to be able to walk out the office door, into retirement, with no regrets. With confidence I won’t ever have to return AND I’ll still be able to afford everything on both my must-have list and my really-want-to-have list. For the rest of my life. Bonus points if I have backup contingency plans to lean on in case I run into a financial crisis or two.
While there’s no way to know for sure how much you’ll need to safely walk away from it all, you’ll have to get comfortable with making an educated guess if you’re serious about retiring early.
Set your number too high and you end up forfeiting precious years of extra work unnecessarily. After all, you can’t take your wealth with you when you die, and there’s no gold star for being the richest man in the cemetery.
Set your number too low and you could end up in trouble when you’re old and it’s not easy to bounce back.
Get clear on your financial values
That’s why it’s so important to think long and hard about your financial needs and values. It will likely take time – years – for you to really understand your financial values.
Why so long?
Because your values may shift during your early years as you learn what’s important to you.
You’ll observe how you spend. How you invest. How you plan. You’ll also learn what income trajectory you’re on, and where you’re likely to top out. And you’ll figure out where you personally draw the line between must-have vs. nice-to-have.
This takes time. It’s hard to rush it. I’ve been contemplating it for a couple years – ever since I started this blog, in fact.
My thinking has evolved since then, as I’ve come to learn more about my own financial values.
Getting married has been a good forcing function for that. 🙂
It’s also given me a few heuristics for how to think about one’s financial values. Here are four that have helped me get clarity:
(1) Which do you value more: time or money?
Unless you’re already independently wealthy, it’s hard to optimize for both. If you value money more, then you’re probably more likely motivated by things like prestige, status, influence, bonuses. You’re probably OK working for the man, as long as you see a clear path to the corner office, a big title, big paychecks, and hey a little fame wouldn’t hurt either. You’re less likely to care about early retirement: because what the hell’s the point of just sitting on a beach all day anyway? That’s what you think early retirees do, and you’d rather be in an important and influential position because it’s exciting and empowering.
By contrast, if you value time more, you’re more likely to prioritize freedom to spend your time the way you want, whether it’s with family or friends, whether it’s trekking the globe or building your own business. You hate being told what to do, being beholden to another’s whims. Life’s short, you don’t get time back, so you want maximum control of it. The idea of missing important life moments with family and loved ones, by another’s whims, really rubs you the wrong way. You don’t need to be the richest person in the room or the most prestigious, especially if it means not getting time with your family or just living a good life. That’s why you draw crystal clear lines between your must haves vs. nice to haves.
(2) Which do you value more: things or experiences?
If you value things more, you don’t mind shelling out for the latest iPhone, that sexy Tesla, the newest handbag, or cutest shoes. You like nice things – nothing wrong with that! And you understand you need money to buy them. But you work hard and deserve it, right? So while it might cost a thousand bucks or even a hundred thousand, owning the newest thing makes you feel good. It gives you confidence. It makes you feel premium. It’s why you like the Four Seasons, not Airbnb. 1st class, not budget airlines. Private helicopter tour, not urban walking tour. You love sipping cocktails in a dapper suit at that exclusive sky lounge with trendy people. If all that comes at the modest cost of burning the midnight oil at your job sometimes, well, that’s worth it – you’re job has prestigious bragging rights anyway!
On the flipside, if you value experiences more, you don’t care for having the latest iDevice. You go for functional, not trendy. You seek value, not wow factor. For you, life is really about creating memories. You want to look back at the end of a long life, having seen the world, been present for your kids, with tons of memories and diverse experiences. Best of all, you shared them with family and friends. You gladly wear out-of-fashion clothes if it means getting to spend that money instead to see Patagonia’s glaciers or roadtripping along the Amalfi coast or walking the old temples of Japan. You want to meet locals when you’re in a new place, not stay secluded in a fancy hotel resort bubble. And they couldn’t pay you enough to miss your daughter’s first steps, even if you were working on the biggest deal of the decade.
(3) Which do you prefer: simplicity or shiny things?
Imagine you’re buying a home. Do you dream of owning a big, stately house? Do you think of all the parties you can host, the friends you can invite, the elegance and glamour? If that’s you, you’re the shiny things type. You like a big house, big yard, big car. Of course, you’ll need to also outfit your new digs, and you want the best stuff: Echo voice, Nest thermostat, iPad room controls, designer furniture. Also, a gigantic surround sound home theater system. After all, your home is your castle, and you want your living space to provide ultimate comfort and convenience.
For simplicity folks, the idea of buying a mansion home makes you cringe. Not only will it cost a fortune, but then you have to pay even more money – and time – to upkeep it. Property taxes, maintenance, big electric bills, plus furnishing all that space. Not to mention things break all the time: whether leaky roofs or fussy water heaters. It’s a money pit. Plus, the idea of filling the house up with the latest gadgets gives you a headache. More things to charge and sync across devices. More things to malfunction. Why buy a mattress-sized flat-screen when you don’t even watch TV and would rather be outside anyway? Keeping up with the Joneses is never-ending. All you really want is to keep your life simple so you can actually enjoy it.
(4) Do you live for the moment or sacrifice for the future?
People who live for the moment want to consume now and live life to the fullest when they’re young. What’s the point of sacrificing your young active years, only to have money and freedom after you’re too old and frail to enjoy life? You only live once, and when you’re young and unattached, most energetic and excited – that’s the time to live it up, see the world, meet lots of people, do crazy things, have fun. You firmly believe things will work out in the end, so why not follow your heart? As the poet Mary Oliver wrote: “What will you do with your one wild and precious life?” You damn sure aren’t going to waste it!
Others take the view of sacrificing and investing for the future. For them, when they’re young and unencumbered is the best time to sacrifice because the opportunity cost is low. By contrast, when you’re older, with family and commitments, you want the freedom to sit back and relax, control your own schedule, take comfort knowing you’re financially secure. While most are forced to work their entire lives, not these folks! They have freedom to retire early, spend time with family, pursue meaningful projects they believe in deeply. All because they planted seeds for the future – strategically – when they were young, at significant personal sacrifice. But now they’re ready to harvest. They’ve lived for years like most people won’t, so they can spend the rest of life living like most people can’t.
Look, these profiles are obviously generalizations. Maybe even extremes. But the point is, they’re meant to stir up themes.
You might find parts that resonate, other parts that alienate. That’s good, if it’s helping you clarify your financial values.
Of course, if you’ve followed this blog for a while, it’s pretty obvious where my values are. But to be clear: there’s no right or wrong whichever way. To each their own.
These heuristics are simply meant to help you probe your values, so you can better prepare for what it might take to achieve the type of financial security you want.
Once you have that clarity, you’re ahead of the curve!
Discussion: What does financial security mean to you? How do you personally come to grips with the question of “how much is enough”? What are your financial values? What heuristics do you rely on to understand those values? Share a comment below!