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.

Towards An Antifragile Life – Living With Volatility

I’d encourage you to read Taleb to experience the hero, and anti-hero, directly. Acting on his books saved me from personal bankruptcy. I owe him much of my personal freedom.

Separate from his tips for financial living, what are the lessons that I can bring into my larger life?

Don’t Tinker, Let My Winners Run, As Much Nothing As Possible – I blow at least $10,000 a year forgetting these points. My sin is neglecting the benefit of “no action.” Every year:

  • I cost myself money by tinkering with my winners
  • I waste emotional energy by getting involved in situations that will work themselves out with my help
  • I spend goodwill via over-correcting the people close to me

The tip about letting my winners run is so persistent in my investing errors that I’ve sent myself an email that I see every time I log into gmail. The other email is designed to make me a better man.

Inbox Almost Zero

Inbox Almost Zero

Maintain Personal Freedom – Taleb’s style is about freedom. Freedom to do what he wants. Freedom to say what he wants. I get that. I need to be cautious with choices that restrict freedom.

Debt – my family has one loan, a mortgage on a house that I could leave and rent for more than my mortgage/insurance/taxes.

Taleb, and others, challenge conventional wisdom about the use of debt, particularly with regard to College. My wife and I left college debt free and that colors our judgement. Friends of mine, that are doctors, talk about debt-free doctors being able to “do medicine right.” Statements like that, bring home Taleb’s advice to use as little medicine as possible.

Pay For Optionality & Avoid Open Ended Commitments – I’ve made both necessary, and ill-considered, commitments in my life. I pride myself on reliability so feel pain when I’m falling short on a commitment, or need to exit. As a result, I’m willing to pay a premium for flexibility and accept less success to avoid long-term attachment. The pain I feel is an Anglo-Saxon cultural phenomenon, in some Asian cultures, it is expected that relationships will change with circumstances. I smile when I think about Northern Europeans doing business in China and India.

Relationships – Taleb is big on parties, especially ones with lots of different interesting people. My goal at a party, if you can get me to go, is simple. Avoid being the most boring person there! I’m selling myself short. While it would help, the solution isn’t to liven up. The solution is to understand that exposure to many different people is helps create a life with meaning and opportunities to use our skills to help others. Networking is about using volatility to our advantage and the most valuable form of networking is having fun while sharing a mutual interest. I’ll go a far out of my way to share a bike tour with a buddy! I’ve made most of my best friends while exercising!

Insurance & Legal Structuring – insulate yourself from the improbable via insurance and appropriate legal structuring (links to blogs that tell you what I actually do).

Toxic People – have you considered the emotional payoff profile of the people that are close to you? Taleb talks about asymmetric outcomes in the financial sphere but far more common is the downside associated with certain individuals. Some people have a poor payoff profile and others consistently make me feel fantastic.

Think about the people you spend time with – how do they make you feel about yourself? Create space for great people by ditching the toxic folks.

By the way, if you’re truly courageous then think about how you make other people feel about themselves – especially people that have no recourse against you. Too often, I come up short here! When I’m tempted to criticize, I ask myself three questions:

  • What are my goals here?
  • Will criticism serve my goals
  • How am I making this person feel?

Taleb rails against bankers and senior management. Speaking as an insider, he is 100% right about how those sectors operate. The deck is stacked, and will remain stacked, in favor of the insiders.

If you find yourself in senior management, or finance, then think back to what was “enough” when you started.

Too often, the compromises associated with success are the seeds that create Black Swans in our personal lives.

Disaster Scenarios

I wrote this following the Four Mile Fire in Boulder.  I held off on publishing out of respect for the local people that lost their homes in the fire.  This piece is a reflection on my life and not connected to the fire itself.


I was placed in an interesting position recently when we were told that we might have to evacuate our house in a few hours.  There was a nearby fire and the forecast called for sustained winds blowing directly from the fire to our neighborhood.

We never know what we are actually going to do until we’re put in a situation.  This is why it pays not be placed in situations where we might make a decision we would regret!  Avoidance is an effective strategy for enhancing an ethical life.

There was no avoiding the fire – it ended up burning down close to 200 houses — so it was interesting to experience my reaction.

My first reaction was to wait and think a bit.  What’s in the house that would be a pain to replace.  I whacked my tax records, checkbooks and ID into a small suitcase.

Next up was borrowing Monica’s phone and wandering around all the rooms, with Lex in tow, and photographing everything that we have in the house.  If the place burned to the ground then that would help with the insurance claim.

Insurance gives me considerable piece of mind.  I have comprehensive policies that cover: my family’s health; general liability; our house; and any material assets.  I favor high deductible policies because my main concern is Black Swans.  I spend a lot on insurance but it’s worth it for peace of mind.

So with the house documented, Monica/Lex secure, and a bit of time to think… I couldn’t come up with much else that mattered to me.  That surprised me.  What surprised me further was a thought that I’d rather have a check in my hand for the value of my possessions than my possessions themselves.  It would be an inconvenience to have my life burnt to the ground but strangely, I felt relieved at the prospect.

This really drove home the value of insurance for me.  Also, be sure to read your exclusions/limitations on your policy.  In the past, I’ve caught myself taking comfort from a policy that didn’t cover what I thought it did!

Zero hardware reliance — the other thing that helped relax me is having set my life up so that I can run everything from any computer in the world.  I’m more efficient on my main machine but I have zero reliance on hardware.  If my home office was levelled then I could be up and running by tomorrow morning.  It took effort to achieve this but the feeling of relaxation, when faced with a disaster scenario, was an unexpected payoff.

The lessons so far — high deductible, comprehensive insurance and off-site backup for all digital info.  

I should probably scan up the documents that I felt necessary to put in my little suitcase.  Then I’d be in a position to grab my ID and walk out the door with my mobile phone.  

Holding hands with Lex & Monica… waiting to see what happens.



Life(style) Insurance

Last week I shared ideas about unemployment – while I am not scared of unemployment, being unemployed is really, really inconvenient.  The tips that I offered up are how I minimize the duration of the inconvenience.  I use similar tactics in other areas of my life.

Insurance can appear expensive until something serious happens in your life.  If something serious happens then you want to be focusing on solutions, rather than worrying about details.  Here’s my list of things that are often overlooked by my pals, and peers.


Health Insurance

I use a high deductible policy and pay extra to increase the maximum limit for the policy life.  The plan we are on is $5,000 deductible with $5 million policy limit.  I include the full deductible in my annual budget and that means that any financial surprises are positive.

In most years, we either pay nothing or blow right through the deductible.  Over a lifetime, it would be unusual for a family not to experience large, unexpected, medical payments.  Being surprised is the norm – I know many triathletes that can been caught out by a bike crash.


Liability Protection

Similar to health insurance, it would be unusual for a business not to experience accidents over a long term time horizon.  Accidents can create liabilities and here’s what I do to mitigate:

Operate safely – common sense goes a long way, especially when backed up by appropriate training and written safety policies.  Make an effort to educate your customers about safety procedures.  This isn’t just a CYA exercise – it will result in less accidents and that’s good business.

Professional advice – My approach may be unconventional:

  • List the things could go wrong in your business – think as broadly as possible; 
  • Share that list with an experienced litigation attorney;
  • Disclose your personal/corporate structure to the attorney; and
  • Insure and restructure your operations to address avenues of recovery.

In some cases, you may discover that a certain line of business simply isn’t worth the risk.  I’ve exited a few situations that were great fun but unacceptably run.  By the time the inconvenient truth arrives, it’s too late to exit.  By the way, the same policy works well for speculative bubbles.

As well, insure your clients/employees to protect them from ordinary accidents.  Many professional bodies (USA Triathlon for example) offer protection to members/coaches.  Read the policies and be warned that “for profit” businesses are rarely covered by professional bodies.  I spent quite a bit of time assembling three additional policies for Endurance Corner LLC (D&O, General Liability and Participant Medical).


Death, Disability and Life(style)

At some stage in the future, I’ll be worth more dead than alive – at least financially.  Until that point, I like to self-insure my life.

To protect my family from the effects of an unexpected early exit… I purchased a two-unit income property.  It wouldn’t been all the comfy but Monica could move in and live “free” on the rental income from the other unit.  Living expenses, and my daughters education, would be covered from renting our current house. Not as good as keeping me around but it would reduce the severe inconvenience of my departure.

When making real estate purchases, look for deals that create options for you to live free.  Even better, look for deals that will subsidize your cost of living.  Here’s an example…

Before I had Monica & Lex in my life, my housing set-up in New Zealand was used for lifestyle insurance.  I purchased a large house (5 bedrooms, US$110,000 entry price).  I rented the a few rooms out in the house so my overheads were covered.  Combined with a small coaching business – it was my fallback strategy.  With the mess that we have in many housing markets, similar deals are available today.  

If you didn’t save capital over the last decade to take advantage of today’s opportunities then make changes so you can take advantage tomorrow.  Cycles repeat themselves.  I’ve seen great buying opportunities at least once each decade and we only have to do one good deal, per decade, to have a successful investment career.

Back to life insurance.  For many of us, the worst thing that can happen is permanent disability requiring expensive and on-going medical care.  I haven’t cracked the code on insuring that risk but I do the following to reduce it’s likelihood:

  • Wear a helmet when I ride;
  • Wear a seatbelt when I drive;
  • Don’t drink – and certainly don’t drink & drive; and
  • Don’t speed – people make jokes about my driving speeds.

If you have ideas on the disability insurance front then I’d love to hear them.  It’s a topic that I’ve been considering since I started riding the open roads.


Follow up Nov 20, 2010: Mark wrote to remind me that the deductible for healthcare should run through an HSA and TR shared that for the self-employed Long-Term Care insurance can be an effective way to insure against unexpected disability.