He is profoundly successful by many financial measurements. Annual earnings place him inside the top 0.01% of the world by that ranking. On a first-name basis with CEOs of some Fortune 500 companies, he is on top of his industry. He lives in a custom built luxury home in the nicest neighborhood of one of the most vibrant cities in the world. His family travels wherever they want, and acquires anything they desire.
How Much is Enough?
That looks a lot different than this nervous wreck I listened to next. He wondered if there would always be enough inflows just to keep up with countless outflows. Worst of all, he knew the stress was unhealthy.
And, guess what? These two are the same person.
This wealthy and worried man openly dreamed of a simpler path with me. He confessed to knowing a guy really well, 20 years older, who he was often jealous of. This older guy has everything he needs and wants, already. His front yard is the Pacific Ocean. He built a small home so there is almost no maintenance to worry about. He pauses after opening the door for a breathtaking sunrise, and the only delay in his barefoot commute to work… waves with his surf board. His stress-free days usually end with a taco, ice-cold cerveza, and a lot of smiles with a close tribe of friends. And, he does it all here on about $9 a day.
As a professional money manager, I am supposed to tell you the difference in retirements is investment success. I escaped Wall Street so I could tell the truth instead. Too much attention is focused on how much money to have in order to retire, and not enough on the choices we make for how to use it.
Maybe these two men are extreme examples, but they do have one thing in common. They happen to be brothers. Yup. Both are richly blessed in different ways. But choices, not investment returns, led each to opposite ends of the peace of mind spectrum.
“Your net worth is determined by what remains after your bad habits are subtracted from your good habits.”
There are countless and confusingly different ways to measure wealth and plan for retirement. We are going to skip all of those, and focus on something so much more valuable – Freedom Day. It is healthier, more inspiring, and lasts longer. Freedom Day occurs when multiple streams of income exceed all expenses (needs and wants), and can last until the age of 100. Overflow is kept separate, as contingency cash, for unplanned events.
We found five keys to finally, and definitively solve the question: How Much is Enough?
1. Informed Simplicity
Regardless of how big any of your numbers appear to be on various financial statements or potential deals, they must result in a simple written plan that can be summarized on one detailed sheet of paper. To measure progress it must be simple to track.
Complexity is the enemy of execution and discipline. From our belief system (we suggest yours is in writing as well) one of the easiest rules to test all of your investments against is this one: If you cannot explain it to your spouse it does not belong in your house. This simple test has a better track record than any of Wall Street’s most sophisticated tools for risk analysis. Can you hand him or her an efficient plan, printed on one page, and explain it all simply?
“Simplicity is the ultimate sophistication.”
Leonardo Da Vinci
2. Multiple Streams of Income
When your mailbox money coming in, is more than expenses going out, you are in good shape. But, we are aiming for something even better. A single uninsured source of income (like real estate for example) may offer great yield but substantial risk, illiquidity, and a lot of wear and tear over time. Until you have multiple streams of income, with more than one from a completely secure source, you do not have enough. These are four that will show up on every Freedom Day Plan we build.
Social Security: Optimize to best navigate hundreds of claiming rules
Pension: Either corporate pension or a personal pension
Tax-Free Municipal Bonds: Safest, most liquid form of investment income
Dividends: Inflation beating mailbox money to still receive pay raises
Notice one thing those four streams of income have in common? None are inside of an exotic fund or Wall Street product. The bottom three have all stood the test of time for a century or more.
“The question isn’t at what age I want to retire, it’s at what income.”
3. Our Benchmark is 100
For Freedom Day, income must be available until at least 100 years of age. Years ago we got a lot of funny looks from prospective clients when they heard this requirement. We had to remind some that we do not monitor diet or exercise, we require this only of our math. We are not comfortable planning for an average retirement period.
We wrote about the the misleading math of "average rates of return." Average life expectancy numbers will doom even more financial plans. Those average ages take into account all deaths. Calculating income streams for a married couple to retire at 65, who is still alive at that time, is an entirely different equation. The Society of Actuaries’ data reveals that half of those couples who are in good health will have at least one of the two celebrating a 95th birthday and beyond!
“Live as if you were to die tomorrow. Learn as if you were to live forever.”
The number of years in retirement is moving higher, more consistently, than any investment return number trying to keep up. We have the great honor of celebrating 100+ year-old birthdays with a few three generation client families. Planning for their legacies is inspiring to us. Regardless of when our time runs out, knowing that multiple sources of secure income will outlive us means that any extra appreciation in asset values is just that – extra – and not part of the income plan. This incomparable peace of mind gives birth to planning who or what we would like to give that extra to.
4. Planning > Predicting
If any part of your retirement plan is based on predictions of future growth then you do not have enough yet, or you have too much at risk. So, every single conversation, concern, or hope about the performance of the markets should not be able to scratch one penny of your income.
Even the most sophisticated and wealthiest families are often confused by this part of the Freedom Day Plan. Assets that fluctuate in value are just fine to own, but only after your multiple streams of income are planned for. The discipline of planning and removing enough of your nest egg from harm’s way, I assure you, will last longer than anybody’s market predictions track record.
Part of that planning is eliminating any $1 of unnecessary risk, costs, or taxes which has the same effect on your bottom line as making another $1 in profit. Really think about that. Making a plan more efficient has dramatically more compounding results on the math than predicting does.
“Predicting rain does not count, building the ark does.”
5. Completely Redefine Your ROI
We humbly suggest you turn almost everything Wall Street has taught you upside down. We are not throwing stones from a distance. We spent the first half of our careers inside the belly of the biggest bank/brokerage beast. Their business model is adding to a mountain of assets for them to charge fees on, plain and simple.
Their first obligation is to produce profits for their shareholders. They hope to provide a decent return on investment (ROI) for their customers some of the time, along the way. When disaster strikes, the solution is always the same - “hang in there.” That ROI always wins for the mountain. But, investors have to know how much is enough, and when to stop climbing. We escaped Wall Street in 2006 for this reason.
Rather than focus on their traditional ROI, what if you turn those letters upside down in YOUR favor?
I: Income is the only outcome that matters to achieve Freedom Day
O: Opportunities for risk capital come AFTER your income is secured
R: Reason you want to achieve Freedom from worrying ever again
That Reason is the only intangible part of our question - How Much is Enough? As much as we agonize over numbers every single day, let us candidly share something just as important from three decades worth of notes measuring the most successful Freedom Day Plans. Have a clear purpose for just what to do next with your most valuable of all assets – more time. Once all the hows and whats of the math are solved, then you can focus exclusively on your why. That reason is just as important as the numbers.
“It’s never too late to be what you might have been.”
We have at least have one thing in common if you read this far – a strong belief that curiosity beats conviction. Anybody, including us, who think they have all the answers do not even understand the questions. NONE of the above is in any way a recommendation, we would not dream of making one of those to anybody we do not know. It is just a few thoughts on our best and honest answers to an important question we think should be explored more.
On Twitter @RyanKruegerROI