Tag Archives: personal planning

Structuring A Family Pension

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Ax_iglooThree questions for your next family meeting, or your financial adviser:

  1. How long of a retirement should we plan to fund?
  2. As a couple, what is our joint life expectancy?
  3. As a family, how do we invest considering our collective life expectancy?

Today, I’m going to take you into the future of your retirement, your children’s retirement and your grandchildren’s retirement.

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Retirement

If I make it to 63 then my wife will be 55. At that point, there is a 50% chance that at least once of us will last another 31 years. Here’s a calculator that you can use.

It’s worth repeating – as a couple we have a joint life expectancy of 31 years when I reach 63 years old (17 years from now). Today, my wife and I have a joint life expectancy of 47 years.

That’s a heck of a long time for inflation to act on our cost of living.

Inflation of 2.5% for 47 years brings each $10,000 of current expenditure up to $31,917.

In other words, despite being middle aged, our core cost of living is likely to triple across our lifetime.

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Children

The joint life expectancy of my daughters (6 and 2) is 90 years. Their cost of living is going up 8-10x over their lives.

Can I insure against the risk that my surviving children run out of money late in life?

Let’s look at a case study.

At the end of last year, I was considering an expensive vacation. I couldn’t justify spending the money on myself and the calculation that follows is part of the reason.

As a family, we can make the decision to invest $10,000 per annum. There would be no impact on my quality of life.

What could it do for my children?

  • $10,000 per annum, invested for 47 years, 5% rate of return is $1,781,194
  • $1,781,194 invested for an additional 13 years at 5% is $3,358,707
  • Over $3 million in 60 years from redirecting my vacation budget

Let’s talk in 2015 dollars. I have no idea about future inflation, let’s assume 2.5%.

  • The $3.4 million will be worth a lot less in 2075 than today
  • $3,358,707 discounted back to 2015 at 2.5% is $763,379

In case I’ve lost you.

  • The cost is foregoing $10,000 of annual expenditure for the rest of my marriage.
  • The benefit is my survivors share a 30-year retirement income with a current purchasing power of $49,658 per annum.

The payment is calculated with 5% rate of return, over 30 years, with $763,379 starting value.

It’s never “too late” for compounding to work for your family. I’m closing in on 50 and can leave a valuable form of insurance to my children by changing my current habits.

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Grandkids

Run the exact same scenario except I have 85 years to grow the capital.

  • Invest $10,000 per annum for 47 years
  • Roll up for another 38 years (85 years total)
  • Discount back 85 years at 2.5%
  • How much income for the surviving grandkids (in retirement)?

30 years of $90,705 per annum in 2015 dollars ($1.4 million of present value, 5% rate of return).

It’s worth the effort to learn finance and tweak your wealth behaviors.

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This post inspired by Nick Murray’s book, Behavioral Investment Counseling

Link to a google doc that let’s you tinker with my assumptions. Make a copy before editing.

Quarterly Update – Q1 2015

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winterFebruary contained the most (winter) laughter since my kids were born.

Much better than a gradual slump into seasonally-maladjusted depression!

Rebalancing & Asset Sales

  • No changes in asset allocation.
  • Small purchases to rebalance to target allocation.
  • No year-end tinkering for tax purposes.
  • Cash and short-term treasuries will fall to 6% of our family balance sheet once we make 2014 retirement purchases before April 15th.

We decided to take three non-yielding assets and put them on the market => a vacant lot, a piece of jewelry and a painting.

  • These sales could free 10-15% of the family balance sheet.
  • We expect to save 5-8% of our core cost of living by reducing taxes payable and insurance expenses.
  • A low tax basis on the vacant lot means there will be capital gains payable. However, we own the house next door and the capital increase on the house (as the neighborhood is upgraded) will mitigate the tax bill from the sale.

Simplification

The biggest change is with my working life. I’ve cut way back with non-family work.

Six years ago, I had over 60 third-party clients. Currently, I work with 3 families. The result is a significant change in weekly time allocation:

  • Kids/Spouse => 35 hours
  • Third-party Work => 5 hours
  • Family Work => 5 hours
  • House Work => 5 hours
  • Exercise => 15 hours
  • Open => 20 hours

The “open” time has been transformative.

I have time to read, write, think and unwind => none of these focus on external achievement, another change.

I also have a lot of flexibility for quick trips and short-term projects. My working life is bursts of focused effort with most projects being 2-10 days long.

Kids

2011-2013 were tough. I’ll write more in a separate post – 2014 was a transformative year for the family.

Freedom of Occupation – Choosing Personal Freedom

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Lexi_airportOver the last year, I have been offered attractive opportunities to return to full-time work.

In evaluating the opportunities, I realized the interaction of two variables.

  • The value that we can add to a situation. Call it my “value-added per hour.”
  • My core cost of living.

In the course of my career, I’ve lived the life of an athletic coach as well as an executive. Sometimes I’ve done both at the same time.

An excellent coach, or personal trainer, might net $35 per hour.

A skilled executive will be closer to $500 per hour.

Who has more personal freedom?

When I was younger, I was inclined to believe that more pay results in more freedom.

I’m not sure.

When I think through my pals, the individual who’s daily life most closely resembles my own isn’t who you’d expect. He is a $35 per hour consultant. My friend can live well on $500 per WEEK and has no net assets. He’s created a life where he has freedom of occupation and can say “no” to anyone.

Because of the value-added per hour differential, my buddy works about 25 hours per week. He nets more than his baseline needs. He lives an abundant life, free from financial pressure. He travels internationally. He can work from anywhere and enjoys freedom of location.

What about the executive?

A corporate lifestyle is highly variable, bouncing from 20 to 65+ hours per week. Sleep is often sacrificed and it’s common to spend much of the year nudging health back on track. Vacations are spent immersed in passions that take a back seat to the primacy of career (hobbies, sports, marriage, family).

My point is we all make trades => to get more, of what we think will make us happy, we can be tempted to pay in health, in failed relationships, in reduced freedom and, occasionally, in ethics.

When I speak with highly-paid professionals, they focus on the need for increased assets, and passive income, to attain the freedom they desire.

They ask my help to create a plan that results in freedom.

Freedom to do what?

The freedom to be healthy, to be serene, to be a great spouse, to do my job the right way.

Freedom might be closer than you think.

What is your value added – Streamlining low-value busy-work

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ax_valThis was a coaching question but it applies to anyone with a boss, client, student or colleague.

Novice coaches often mistake inefficiencies with dedication.

Spending hours, upon hours, on administration and busy-work that add very little value to their client, or boss.

Specifically, there is a reluctance to use templates and recycle work. In fact, they think that anything not built from scratch is cheating.

Under what conditions are templates cheating?

  • don’t work
  • not fun
  • lower compliance
  • fail to meet goals

What to do?

  • Aim towards continual efficiency improvements at what you do
  • Save your work – you have limited number of keystrokes in your life
  • Check with bosses, supervisors and clients on what they value – so you can work on the right things!
  • Pay attention to what limits your performance and enjoyment – admin will make you miserable, especially when it can be avoided
  • Notice, and keep, what works
  • The cost of (an inefficient) status quo is hidden
  • Frequently pause and ask… What is important now?

As an advisor, remember that performance is driven by behavior, not protocol – the best protocol is the one that motivates effective behavior.

Personal inefficiencies don’t motivate effective behavior in others.

What are your most effective behaviors?

Be the brand.

Keep it simple.

The Body You Want

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When my wife was a teenager, she really wanted curves.

coach_monsyThings worked out.

My teenage desires were different, but common. I wanted to be jacked.

gordo_crunchThat worked out too.

By the time we both got exactly what we wanted, we wanted something else.

We wanted to be whippet skinny so we could run fast.

We wanted to look like tall, but ripped, 14-year-olds!

G_WhipThat worked out, again.

I spent twenty-five years only to get right back where I started.

I noticed that there is an enduring feeling of my body being slightly unsatisfactory.

Once I noticed this pattern with my body, I saw it elsewhere.

Personal safety, other people’s driving, my house, my finances, my life situation… In many situations, there is a slight feeling of unsatisfactory.

I’m always striving to attain satisfaction that’s is just-out-of-reach.

As a young man, I might have seen striving as a good thing. My drive for improvement, my competitive urges, a desire for self-improvement… we have lots of names for the feeling.

Some cultures call it misery.

See what it feels like for you.

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When I work with others, we use a simple technique.

  • Write down what will make you satisfied.
  • Write down what will make you less afraid.
  • Write down what will make you feel secure.

Out of your list, choose one thing and work towards it.

Work slowly, pay attention, write things down.

Give yourself at least 1,000 days.

Ten years might be better.

You might get there quicker.

With my body, I didn’t start to notice my pattern until I’d been at it for twenty-five years!

With finances, I was lucky, I saw my pattern after a decade, took a leave of absence and enjoyed my first retirement.

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The fact that the lesson took a long time was helpful.

Good things happen slowly.

It’s tempting to short cut the process via cosmetic surgery, performance enhancing drugs, or cutting corners (fraud, tax evasion, deception).

Short-cuts rarely work because we fail to notice the slightly unsatisfactory feeling is following us everywhere,

My victories didn’t work, either. My successes left me wanting more and the feeling followed me around.

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So I tried enjoying myself…

Pleasure can temporarily mask the unsatisfactory feeling and many use drugs, alcohol, fatigue and other techniques.

The trouble is… the associated hangovers are increasingly unsatisfactory as I age.

What to do?

If you can see the unsatisfactory nature of things then you might ask “who’s not satisfied?”

Once I could see the “unsatisfied person” it was easier for me to decide he wasn’t going to run the show.

At least, some of the time.

😉

Better Than Expected

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tea_partyLast week, a speedy age-group athlete asked me why I hadn’t been racing much.

I’ve been thinking about my answer. What was said, and what was unsaid.

Here’s what I said,

“You have to remember that I was far better than I expected to be.”

The peace I feel with regard to sport is something that I didn’t expect.

Part of the serenity comes from the experience of giving my absolute best for many years.

Another part is understanding what was required to exceed my expectations, and realizing that’s not advisable.

I have been thinking about my attitude of “better than expected” for YEARS.

I’ve noticed it is spreading into other areas of my life.

  • My marriage… better than expected
  • My kids… better than expected
  • My day… better than expected
  • My life situation… better than expected
  • My health… better than expected

Some of my serenity can be traced to a long-term campaign to jettison anything that stresses me. However, living with preschoolers is stressful and they don’t seem to be spilling into the rest of my experience anymore.

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What was unsaid was the insanity of spending time, and a lot of money, reinforcing the worst aspects of my personality.

What do I mean?

At the edge, I discovered narcissism, sociopathy, isolation and a disregard for long-term health.

In addition to endurance competition, I have the potential to be very good at all of the above!

These attributes are everywhere in society. However, they are easily seen in people at the pinnacle of their fields (even narrow niches). Indeed, many champion athletes would see these traits as necessary, and desirable.

As a true believer, it was extremely valuable to lock onto athletics. It strengthened much of what’s good in me. It’s one of many paradoxes in my life.

I’ll end by paraphrasing a coach of mine…

Sometimes, the best thing you can do for someone is to give them the confidence to leave.

…and life has been far better than expected!

🙂

Wealth Habits – Discretionary Spending

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AX_BellaRecently, I met with a financial adviser and she said two things about her practice:

  • I never talk about spending.
  • Most my clients make so much money they don’t need to budget.

I had a physical reaction to those statements.

I felt sick.

Why?

Probably because not-spending in my 20s had a pay-off far greater than every investment I will make in my 40s.

Eventually, I settled myself down by writing this article.

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#1 – Mean reversion is tendency for natural systems to trend back to the average over time.

Our minds will forecast based on the last 1,000 days, rather than long-term averages.

Therefore, we must force ourselves to consider, what’s the long-term average of this natural system?

Why does this matter in families?

Because the highest-earning family member often lifts everyone’s spending aspirations above the family’s average earning potential. This sets up wealth destruction, as well as unnecessary emotional tension within the family.

The affluent often train their children to destroy wealth.

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#2 – Consider the transient nature of peak earnings and their relationship with time

A great quote from Mr. Money Mustache – “far wiser to earn your freedom while you are still fired up about working.”

I started out in finance, a field which gets you spending!

I managed to earn my freedom at 31 years old – most my peers hung in until their late-50s/early-60s. Their 15-30 years of additional commitment enables them to spend my current net worth on an annual basis for the rest of their lives.

We often make the mistake of spending with reference to current income, rather than current wealth.

As a guy that bought his freedom “too early” – it was worth it. I’m part of a small sample set – most people stick it out.

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#3 – Am I getting value for money?

Is your spending having it’s desired outcome?

The value-for-money discussion requires uncommon personal honesty about what motivates you.

Our motivations are not always noble!

Own your motivations and tailor spending to optimize these aspects of your life.

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There’s no greater impact on financial wealth than current spending.

How many years would your net assets endure based on what you spent last year?

Be most aware of how you spend your time.

How’d you spend your time last year?

There are valuable lessons available from every stage of your family’s life cycle.

2015-01-21 17.50.57

Where To Focus

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2015-01-23 12.03.51-1My piece on What Can Go Right prompted Mark to comment that “Worry isn’t Work.” Lots in those few words — the link is an HBR article on the subject.

Mark’s comment reminded me of two aspects of a meaningful life.

#1 – sharing experiences that require an effort to overcome ourselves

#2 – enduring positive change happens via nudges at the edge of our control

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In 1993, I nudged myself out the door for a walk. My walk was the first of many micro-choices that brought me to my current life.

As a result of decades of better choices, I was able to manage through the adverse events that hit my family => addiction, divorce, fraud, obesity, excessive spending, insolvency, infidelity, death.

Your family’s list may be similar, or different, to mine. Each family has its own set of risks that repeat through time.

Note, that we didn’t avoid the risks, we managed through them.

As Mark was pointing out, we waste valuable energy on remote risks => terrorism, air travel safety, ebola, child abductions, common core. This energy is better spend on useful “work.”

Where to focus?

Focus on small nudges away from the real risks facing your family. My nudges:

  • Choose: AM/PM exercise, shared experiences with people that love me
  • Moderate: booze, sugar, calories, spending
  • Avoid: leverage, drugs, binges, investment concentration

These ten nudges (all of which I control) will give the family the resilience to manage through the setbacks that will continue to arrive:

  • Addiction/Alcoholism
  • Excessive Spending
  • Leverage & Financial Recourse
  • Fraud
  • Abuse
  • Health
  • Mental Illness

It is a surprising challenge to maintain a focus on the little things!

It is much easier to give into the habit of fear and worry.

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SIDENOTE

Each year I like to try one, or two, new things.

I had a mindfulness streak going in 2013 and let that slide. Matthieu Ricard’s Jan 2015 TED talk on altruism discussed the benefits of mindfulness practices for preschoolers.

The results (for the preschoolers) kicked in after four weeks of 3×20 minutes per week.

February has 28 days so it’s a good opportunity to give it a shot.

With all the time I saved from better email management, I have the ability to try new nudges.

Today, am I spending time on the right things?

2015-01-22 08.52.26-1

What I Know But Cannot Prove

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sxm_beachI came across a finance blog asking about the limits of statistical proof in the world of investing.

It reminded me of an old surgeon who shared, “Half of what I learned in med school turned out to be wrong.”

So I ask you…

What do YOU know but can’t prove?

You may talk about your faith.

But for me, the lesson runs deeper.

What is the ONE thing of which I can be certain but can’t prove?

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I start by asking myself, what did my grandparents believe that we now know is false?

I came up with smoking and trans fats. You’ll probably get a more exciting list!

Anyhow, the lesson isn’t to switch margarine brands…

The lesson is to be skeptical with my own beliefs.

I can be certain that some of what I now know will turn out to be incorrect for my grandchildren.

However, I can’t prove which of my current facts are incorrect.

I can only be certain that some of my knowledge is wrong.

So I should be careful when I find wise people on both sides of an issue.

I might be best served by acting as if they were both right.

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This article influenced by Russell: Sceptical Essays (first edition 1928!).

The Lindy Effect is a good way to sort knowledge. The longer an idea lives, the greater its life expectancy.

What Can Go Right

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NYE_2014Above is a picture of my beautiful wife at a New Year’s Eve party in the French West Indies. Strangely, quite a bit had to go wrong for us to enjoy this evening.

Last year at this time I had ZERO idea that event was possible.

If you struggle to shake your fears about what can go wrong then here’s an exercise to help you remain open to what can go right.

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Before your next date night, couple’s retreat or family gathering. Spend a little time asking yourself:

What can go right in my life? 

What I did was take some paper, turned it sideways and wrote two headings…

What Can Go Right // Related Questions

The topics I considered:

  • Asset Appreciation
  • Asset Sales
  • Time Allocation
  • Continuous Education
  • Expense/Income Balance
  • Family Health
  • New Friends and Family
  • Improved Traits

Considering the details opened up some interesting questions:

  • Should we trade out of luxury and low-return assets?
  • Reallocate capital and time towards opportunities for shared experiences?
  • What projects provide the opportunity for family members to work together?
  • What do we want to study?
  • Who is the best person to teach us?
  • Where is a fun venue for instruction?
  • What role does family play in health?
  • What traits are desirable to attract into the family?
  • How can we promote these traits in ourselves?

To hold myself accountable, I highlighted three traits that would make me more effective: be more fun; handle kid noise better; and react more slowly.

In my case, being fun is characterized by being open to new experiences and handling change.

Last year, we did the opposite exercise => What can go wrong => I might be “a little too good” at that kind of brainstorming!

Interestingly, the “wrong list” is full of external events and the “right list” is filled with items that are within our control.

This brought up an essential question…

Am I worried about the right things?