What Do We Need To Retire?

My post showing how a 1.2% fee differential can cost you 131% of your pension contributions inspired Paul Meloan to write an article about The Clear Value of Financial Planning. The article lays out Paul’s case for his work in the field.

To help you understand the cost/benefit relationship, have your advisers write out the dollar amounts that you’re paying in fees, expenses and taxes. Be sure they include all the soft costs that are buried in your mutual funds.

In Paul’s article, he lays out questions for a family to consider. I thought I’d answer these questions, as viewed from a life outside the box.

#1 – How large of a pool of assets do my significant other and I require in order to live in the manner which we desire for the rest of our lives?

The most important thing for you to remember is to declare victory immediately. You have more than you need and are in a position to think about the future. Many, many people are less fortunate than you. Spending time with the less fortunate will temper your needs and get you to financial freedom more quickly.

The financial services industry is built backwards from your true needs. If you listen carefully then you can hear the industry say, “you can be happy tomorrow if you have more.”

Be happy now, with less.

I recommend that you flip question #1. When I look at my family’s net worth, I express it in terms of “years of current expenditure.”

For example, if your net worth is $500,000 (Assets Minus Liabilities) and your current expenditure is $125,000 per annum then you have FOUR years of current expenditure (500,000 / 125,000).

Why is this is a useful way to consider your position? It’s useful because it changes the conversation from

  • What do I need to be happy tomorrow?; towards
  • How can I spend wisely today?

The years-to-burn exercise reminds me that the fastest way to improve my financial position is to reduce my current expenditure, not take more risk.

In terms of years-to-burn, my peak wealth was 13 years ago. I was living out of a Subaru and sleeping on a friend’s floor in LA. My life was extremely simple – eat, sleep, train. It was one of the happiest periods of my life and my net worth was 1/6th of right now.

It’s worth repeating… I increased my net worth by 600% and feel less wealthy.

Historically, most my spending has been wasted.

  • luxury air travel
  • high-end hotels
  • excessive childcare
  • personal assistants
  • office space
  • non-performing assets
  • personal luxury expenditure (clothes, cars, boats, vacations)

I ditched most of these because I discovered that they were bandaids healing myself from a lack of satisfaction with daily living. My spending was driven by our culture rather than my needs.

Choose your hometown and your buddies carefully! I assure you that the exact same family will have needs that vary by geography. Consider:

  • Manhattan vs Boulder
  • Aspen vs Truckee
  • Palo Alto vs Greenville
  • Santa Barbara vs Hood River

I came close to moving to Palo Alto to spend more time with my pals (love you guys and gals). It would have changed my life – not better, not worse – but absolutely different.

The more time that you spend helping people that have less than you, the smaller your retirement fund will “need” to be. There are examples of this all around us.

Finally, the benefit of wealth is not to leave work. The benefit is to feel secure enough to choose meaningful work, regardless of compensation. Hang out with people that are rich in personal satisfaction (artists, priests, teachers, ministers, caregivers, coaches, guides) – you’ll know them when you speak with them.

#2 – What should be the composition of that pool of assets, and how should they relate to each other in terms of risk and expected returns?

You can beat all of your pals by using Bogle’s Little Book of Common Sense Investing.

As a bonus, the strategy is simple to understand and easy to execute.

If you can’t figure the book out then call Vanguard and they will help you in exchange for a fixed price fee when you need help.

If you keep screwing up then get yourself a financial coach and pay a fixed fee to hold you to your plan.

We all do better when someone is watching – that’s why I have a blog.

More Than Money – Sharing Time

It’s common to think of volunteering as giving time to a cause.

The most powerful lesson of hospice is the reality that, short of organ donation, I can’t give time to anyone.

What I can do is share time.

+++

In most of our roles, we can be swapped out. Absent someone to love, this can be a lonely reality. Family roles, particularly parenting children, is an area where it’s more difficult to replace us. Interestingly, these are roles where love dominates. Kids can survive just about anything if they are supported by the knowledge that they are loved.

My family is central to my life’s work. It’s the most direct way I can influence the world. Volunteering is most useful when it makes me a better member of my family. By “better” I mean wise.

Given that I’m married to a woman where “the tone is the message,” I want to spend time in situations that improve my soft skills. My family, and my marriage, doesn’t receive much benefit when I improve my technical knowledge.

Gordo and the Easter BunnyVolunteering puts me in situations where I am truly clueless. For at least a few hours a week, it’s good to realize that I’m clueless! Specific to hospice:

  • there’s no ability to fix anything
  • I’m not empowered to do anything other than serve
  • my best course of action is nearly always “quiet presence”
  • I create a habit of doing what needs to be done
  • I do my work without expectation of being thanked, or paid

If you have young kids, or elderly parents/grandparents, then you may find a lot of similarities with my list and your role.

Most of the friction that I observe in families is due to someone seeking to fix a situation that isn’t their domain, or doesn’t have a solution.

In terms of self-improvement:

  • Volunteering rewards me if I act in a manner completely different than my typical persona. Until I started volunteering, I had never received positive feedback for being a quiet, humble helper.
  • Caring for the sick has an unavoidable benefit of increasing tolerance. You can’t help but change your opinion of people when you’re serving them.
  • Making a habit of good deeds gives me ammunition to take on the voice in my head that tells me that I’m falling short.
  • Pushing my fear envelope is exciting and increases my ability to think clearly in situations that are emotionally charged.
  • Work that challenges the heart leaves me feeling grateful and gratitude is an effective antidote for most everything that ails me.

Whatever your field, when you hear the call, I urge you to follow it.

Goodness through action.

Lessons From A Year Of Giving

In 2013, we decided to give away a small percentage of our taxable income. We’re going to try again in 2014. Here’s what I learned…

To make giving happen, I need a budget. Having the budget also makes me more willing to give because I don’t get caught in a cycle of thinking I “can’t afford” to help or thinking that our giving is too small to make a difference.

I need to remember the giving makes a greater difference to the giver than to the recipient.

The process we used was:

  • Decide on an annual amount
  • Split into monthly allocations
  • Give monthly

Small gifts offer the most satisfaction. This surprised me. The easiest way to describe the positive sensation is…

  • The spirit moves me to give
  • I’m open to that feeling
  • I give
  • I feel good (by not having to close myself to not give)

The size of the gift isn’t important for the “feel good” and I try to always have dollar bills with me. Here’s The Dollar Game that my wife and I played.

What seems to be most important is being open to receive a call to give, then heeding that call.

Giving is a learning process. I had some gifts that didn’t work out from my end and I learned from them. I can group them into categories…

Facilitating something I don’t believe in – giving money to alcoholics so they can buy booze, for example. That didn’t work out well for me. Sitting here now, I don’t regret those gifts but think it was a good decision to keep them small.

Some people, and institutions, don’t need help. An example, might be giving money to a wealthy alma mater, a for-profit corporation, or an inefficient charity. With individuals, struggle is what gives meaning to life, and valuable feedback. I’ve had a poor hit rate with individual sponsorships.

This year, 90% of the money and 100% of the time that we gave away worked for us. That’s an outstanding return for the first year. So I want to remember…

  • Have a budget
  • Keep it small and frequent
  • Stay open to helping
  • Learn from the process

An Exercise in Generosity

My wife and I have a game going where we are racing to give away $100. The trick is we need to give $1 at a time to 100 different people. We’ve found it far tougher than we expected.

We’ve learned a lot about our attitudes towards generosity. Here’s what we’ve noticed with our internal chatter:

It’s not enough – we hold ourselves back because we are worried that we can’t give enough. This fear permeates all aspects of my life – particularly within family relationships.

What if they get mad at me – because “it’s not enough” there is a fear that there could be recriminations. My antidote is to remind myself that I’m giving what I can and something is much better than nothing. That said, my irrational mind is still afraid and it easier to avoid involvement than risk by helping a little.

To counteract the above, I use my (wildly outgoing) four-year-old daughter to insulate me! She doesn’t have my fears, or chatter, and loves interacting with people. She’s been a positive influence and looks for situations where “we” can give money.

My wife’s been experiencing the same dialogue in her head. Her antidotes have included explaining the exercise and apologizing for not giving enough.

When I reflect on my reasons for closing off – not enough to give, person doesn’t deserve help, fear of rebuke… they don’t hold up to scrutiny.

Without a doubt, my community would be better from lots of consistent little gifts. Going further, I’d certainly feel better.

Based on the gifting rate of our Dollar Game, which is embarrassingly slow, it would take us close to two decades to get through our annual gifting target…

…either we need to increase the bill denomination or change our attitude.

Once I relax and give to everyone, I find myself more open. I don’t need to choose, judge and rationalize.

To give an extra dollar in every interaction I have in a year would cost me less 1% of my net income.

If you see me then hit-me-up!

I have a stack of ones that I need to share.

What’s Your Gifting Strategy

I love riding my bike with friends. To create more opportunities for that to happen, I give away a lot of cycling gear each year. When my friends wear the gear, I hope they think of me – even if they don’t think of me, it makes me happy to give gear away.

Here’s what I’ve learned about gifting…

It is an essential and effective way to influence behavior.

At some level, most of us feel that we deserve gifts. I need to be cautious about reinforcing entitlement in recipients.

The best gifts are items we can use while doing a favorite activity. An athlete-buddy of mine gave me a set of nordic ski underwear and gloves. I think she wanted me to learn to ski! I use her gift weekly and think about what a considerate person she is. The shirt makes me so happy (it’s my favorite color) that I wear it as casual wear. It’s not surprising that my pal scored a homerun with her gift, she’s a psychiatrist.

Gift frequency is better than size – for example 4 gifts of $250 generates more happiness than one gift of $1000. However, see habituation below.

Random is better than scheduled – I like random gifts. If I see something somebody will like, I get it and send it over to them.

Value is highest at point of award, not receipt – important to remember this for children, employees, heirs and other important people that you gift towards.

Consider my piece last week about Class Dojo, earning the ten points my daughter needs for a treat gives her more pleasure than the treat itself.

An example from the corporate world… At the private equity firm where I worked, the partners would award annual profit sharing points – there were 10,000 points available for each investment fund and we’d earn our share of 1,000 points annually. This system spread the allocation across many years, rather than having it back-end loaded when the investments were sold.

Things that people will use often, and associate with you are excellent – think about my friend’s gift of a shirt and gloves. To give me the same amount of pleasure she would have had to send me $5,000! A well-selected gift is worth far more than its monetary value.

Gifting to people’s children, ie via education, is deeply appreciated – parents have a sense of obligation towards their kids.

People (employees, spouses, kids, yourself) adapt very quickly to changes in standard of living, and forget how they got there. I avoid gifts that eliminate the self-esteem that comes from taking care of one’s self.

Be wary of reinforcing feelings of entitlement – for example, beautiful people and skilled athletes are trained that the world will take care of them. As they age, they experience pain when their gifts of chance (beauty and athletic prowess) fade.

+++

Some people gift publicly for reasons of family, or corporate, strategy. Others prefer to gift anonymously. Considerations:

  • Be wary of the motivation of recognition.
  • If you ask your pals to support your causes then you will feel an overwhelming need to reciprocate (and you might not feel the same desire to support their causes). Of course, remember that it is OK to say “no.”
  • Most of us have small budgets for gifting – pay particular attention to situations where a little time and money can have a big impact.

If you need more of something then have a strategy to gift some of what you need.