My initial response, short as it was, is that this question is quite philosophical and while it is there are also many practical considerations to think about as well.
The first practical consideration is that many people (all people?) are down from their highwater marks and there is a just get me back to even mentality at work. If I can only get back to even then I'll....so the mind may be more open to game over than it otherwise would. Figuring out how influenced you have been by this line of thought could be huge and be the difference between lagging a bull market and missing it altogether. Most investors are unlikely to really beat themselves up if they go up 150% in an up 200% bull market (remember Hussman says the average bull market is 180%). Up 10% (compounded interest maybe) in an up 200% bull market would be a different story.
The other big practical consideration is not as psychological but is very difficult to predict which is one-off financial events. Maybe your bills (including various insurances) are $3000 a month. Maybe you need another $1000 for walking around for the month (the occasional dinner out, a round or two of golf for those so inclined, gas for the car and so on). Then what might you need for taxes? What about travel? Ok after that it gets far less predictable.
I've said before, look at your Quicken register for the last twelve months. How many vet visits, car repairs (oil change, brakes, tires, worse), Home Depot-type fixits or wedding invitations do you see and those are the small things. Then every so often there will be bigger things. This year summer my wife broke a tooth, what if something horrible happens to the roof or plumbing? And there are obviously more serious things than that and all of it is unpredictable. You may get lucky with these things or not there is obviously no way to know.
As for the philosophy, there were plenty of comments but I don't think they the came at it in the way I would. Most people might come at this wondering do they have enough money. People associate having a lot of money as being the way to mitigate money problems and of course the thinking is correct but it is not the only way to come at this. And in fact accumulating a lot of money is quite difficult to achieve.
The other part of the equation, other than how much do you have, is how much do you need to cover your lifestyle? I would submit it is much easier to choose a modest house, drive a car for ten years (Toyotas and Nissans), not buy $300 shoes, realize that clothing can be bought at Costco, don't use credit cards (other than for the cashback or rewards programs), don't buy every gadget, learn how to fix things yourself, take lunch to work and so on. Keeping the predictable expenses low would seem to be much easier to do because it usually just depends on self-discipline. The self-discipline required may not be easy but it does boil down to a person doing for themselves.
If you have a lot of money then you may not have to worry about having enough but if you have no mortgage and no car payments then you probably don't have a lot of money worries either.
Big congratulations to Jim Rice for being inducted into the hall of fame. In 1978 he became the first and only player to lead MLB in homeruns, RBIs and triples. Triples.
On another sports related note, it was a great Tour de France this year. Lance's third place is a monumental achievement in my opinion and it was thrilling to watch. Interesting comment from Phil and Paul at some point over the weekend that if Alberto Contador had stuck to the script that Astana could have gone 1-2-3 on the podium. Well, let's see what team Radio Shack can put together in 2010. It will be interesting to see how many of the guys from Astana want to go over to Radio Shack. That could say a lot about what was really going on with the Astana during the tour.
14 comments:
I always approach cash flow expenditures in layers, 1.foundation or basic living, 2.semi-basics (deferrables or upgraded basic), 3.nice but not necessary, and then 4.legacy or luxury. People have to begin by thinking of seperating needs from wants, and then having a discussion on how to fund these in the future with risk profile appropriate to the nature of the expenditure.
I am a big fan on Levi, he seems to be a good person, hated it when he went out injured. Lance is great, but this year Alberto was the best. Hope someone writes a book on the dynamics within the 2009 team someday.
Lance' 3rd place is amazing based on his age and the long lay off. I am sorry he ever quit. I can not wait to see next year as he says he thinks he can still improve from the long lay off.
Most of the personal finance guys I listen to advocate exactly what you're saying here. A written budget, being 'aware' of where the money is going, etc. The thing that confuses me is that nearly all of them recommend keeping a mortgage especially if the interest rate is low and putting anything that's left into the markets. It seems sound on the surface, but I wonder why not just invest a little and pay off all debt. Why is housing debt somehow better than car debt or other debts that the personal finance guys say pay off immediately? It's almost like you're taking out a loan (your mortgage) to invest in the market.
I understand that the numbers probably work to the advantage of being invested in the markets over the long term, but I think risking the roof over your head for a few percentage points seems a bit foolish. Sure, you can always 'borrow' against your 401K, but then you can lock in your losses during a downed market. I just think this 'conventional wisdom' should be challenged at least a little bit.
Where did I go wrong?
BillB,
that can be my greenfaucet post today, thanks! if you are interested in my thoughts on it please check over there in a couple of hours
I occasionally go back to this article from the FPA Journal. It was referenced by one of the finance writers on Yahoo.
The idea is simple:
1. Save 12% of your income starting at age 30
2. Pay off your debt (esp. house) by the time you retire
The article assumes a 5% return (refreshing back in 2006, eh?) which should give you 12x your pre-retirement salary. A 5% withdrawal rate then gives you 60% of pre-retirement income.
It makes a lot of sense. Me? I just keep paying extra on the house and shoving money into investment accounts. Heh.
1.
No Bosox this year?
Here's a little different take on today's thread. Someone (ING maybe) is running an ad campaign based on attaining "your number" for retirement. It's unsaid what that's based on, but it's probably to maintain your current lifestyle in the face of assumptions that favor ING and not the retiree.
You've touched on this before, Roger, and you're right--when you retire, your number is what it is. My guess is, for nearly everyone, it won't be the seven figures that the actors are carting around in the ING commercials.
Plan all you can; it's unquestionably the right thing to do. And start early. But in the end, it's almost a certainty that most folks will end up having to adjust their retirement expenses downward to meet their income. How much is enough is resolved by how much you have. That becomes enough.
Thanks Roger. Would you mind posting the link to your article here or on twitter when it becomes available?
Retirement is just another set of phases: Planning does not cease and neither does the possibility of improving the state of one's assets or one's mind or activity level; how a balance is struck (and changed again later) is where things get interesting as opportunities to assess what matters most will surely come as thick as fleas, at least one would hope so.
Since Ford has made me such unholy amounts of money I do feel obliged (quality and performance reports are much better now too; wouldn't want to dive off the deep end, eh).
I read somewhere that Contador is leaving Astana to form another (unspecified) team so, assuming that is so, whatever the dynamic during this Tour it does not appear to have resulted in vows of eternal brotherhood.
The team was never going to stick together. Lance has a new team next year and I believe he's taking the manager (who was his manager during his tour victories) with him.
Lance and Johan Bruyneel will stick together because they will attract tons of money from sponsors and most of the top domestiques who want to cash in.
Looping back to your mortgage post on Greenfaucet--I paid off my morgage the day after I retired at the urging of my tax advisor, and found it hugely liberating. I have to admit, though, I wanted to scoop up one of those mortgages that were under 5% not too long ago!
On the other hand, I have a good friend who didn't pay his off because he loved looking at that pile of cash. He had it invested to generate 7%, enough to almost cover his interest. Today, his pile of cash has shrunk by nearly 30%, his home value is down over 25%, and the mortgage is still due every month. He has gone back to work.
I agree with you on almost everything, Roger, but I think you're way wrong about prepaying the mortgage.
RE Greenfaucet post: Paying off a mortgage is a classic net present value problem. Like all such calculations, the devil is in the assumptions discount rates, tax rates, investment returns etc. I do these all the time, especially in making capital improvement, equipment purchases in my business. It is a very objective and unemotional method for making reasoned decisions.
I am the one who posed the enough question yesterday. I agree it is a very philosophical question, but I was hoping to discuss it a numbers perspective.
Without going into details, I have been fortunate financially at 46 years old. I am in the camp that believes building wealth and preserving wealth are two completely different endeavors. I am also firm believer in the buy/hold/rebalance passive investing model, the past two years only strenthening that resolve. I also admire the writings of Benjamin Graham.
My question really boils down to developing a bullet proof allocation to last in perpetuity. A 2.25% withdrawal rate can easily provide me with a comfortable living and also for the contingencies that you mention. I currently have a 45% equity/55% fixed income allocation with foreign exposure and a heavy value tilt. I believe the expected real return to be around 3.5% to 4%, so I believe I have a comfortable margin for error. Like a lot of small business guys, most of my wealth is in taxable accounts, so tax efficiency is a huge consideration for me, at least for the time being.
I think that I am in a position to be satisfied that market returns can meet my financial needs. I don't want my life to center around managing a portfolio, I want to go out and experience some of the more interesting things in life since I have deprived myself of them for the last tweny years.
Any thoughts anyone?
to take a hyperbolic example, someone with $20 million in the bank and a $100,000 lifestyle may not need any equities at all.
The closer someone is to something like that the more conservative they can be.
Don't forget selecting your spouse wisely and stay married. That may be he best investment of all. Add love - even better!
T
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