Knowing When to Walk Away: Financial Planning for an Unknown Ending
Before my grandmother passed away, she whispered in my ear, "Don't ever stop loving life, don't ever stop." She was 77, and that was the last time I ever spoke to her. I was 25 at the time, working like a dog for the past two years out of college. I had gained 20 pounds, and was pretty miserable. Regardless, I knew very well not to mess up my one chance at building a solid foundation and just kept on slaving away at my corporate job.
Now that I am almost half her age, and have generated some resemblance of a nest egg, I've come to realize the simplicity of her words. People somehow have a built upon a notion that they must amass a certain amount of money, no matter how long it takes, before they can retire. Yet, what if it took you 40 years of work to reach $1 million, and the very next year you died? Would all your work be for naught? It depends on how much you enjoyed your work, of course, but for the most part, this scenario is not ideal.
For all of you who don't absolutely love your jobs: Instead of shooting for a monetary number before retirement, aim for a target age to retire — whether you've achieved your number or not! At that desired age, drop your pencil, close your books and just walk away. Millions of people above the poverty line live on comfortably less every year, so have no fear. After reading this article, you won't even have to second guess not having enough money to retire, because there's never enough.
Peter Jennings (67), Michael Jackson (50), Princess Diana (36), and Heath Ledger (28) all died too early based on the average American life expectancy of 78, according to the Centers for Disease Control and Prevention. The CDCP's data is based on 99% of death records reported in all 50 states for 2005 and documents the latest trends in leading causes of death and infant mortality.
Nobody knows when they will die, but death is a certainty, and achieving your fortune is not. Although studies show the average life expectancy is 78, what if you were the unlucky one who ended up below average? What if you knew that 80% of the population died at age 65, would you still be willing to work until 60? No way. Some may even quit their jobs today. So many of us think we will live beyond the average age, but mathematically, it is impossible for us all to triumph.
Financial advisors scare us by preaching the importance of saving and investing for the future, or else we'll end up broke. In a way, it's smart to create that sense of urgency. Much like studying for a final exam, you aren't going to study for an exam that's 3 months away until a week before. (If you scared yourself into studying now, however, think how much better you'd score!)
Life Speed Accelerates
It's true. Every year goes by quicker than the next. Let's say you were to live until 100. The first year of your life is but a small 1/100th fraction. However, the 51st year of your life is 1/50th, or literally twice as fast until the fraction becomes 1 (when you are 99 with one year left to live). Hence, I suggest recalibrating your life expectancy down to 65, and shoot for retiring no later than 50.
With a shorter time frame to build your nest egg, senses are heightened like a ninja in the night, and you're forced to focus on every possible way to make and save money. By setting an earlier retirement goal, you'll have a better chance at doing everything you've wanted to do without any regrets. (After all, we deserve to retire for at least half the number of years we've worked.)
"What if I live longer than 65?" you ask? Well, then every year you survive will feel like a blessing. But, let's be smart too, and as a back up, also provision for a longer life. By mentally preparing for a shorter life, we concentrate our energy towards disciplined finance, and at the same time, maintain the hope that we will indeed live longer and provision accordingly.
For those who are masters of the basic financial tenet — spending less than you earn — most of you will have too much money left over come that fine day. There is absolutely no point in making money if you aren't going to spend it. Like the game of gin rummy, whoever ends up with too many cards (money in our case) at the end loses!
Let's say you averaged a healthy $90,000 a year for 30 years and managed to save $1,500,000 for retirement by age 50. If you've mentally prepared to pass at 65, you have a hearty $100,000+/yr to spend on your life style (assuming no growth and no social security). Even if you die at age 78, you still have $60,000/yr (assuming zero income growth).
Alternatively, if you were to follow the norm of a 4% yearly draw down, you'll receive $60,000/year for the rest of your life (provided your $1,500,000 earns 4%/year, which is quite reasonable). The problem with a 4% draw down is that you still have $1,500,000 left when you die, which you didn't spend!
Instead of using a 4% return and draw down assumption, assume a 0% return and extend your life expectancy to 100 to be conservative. Your 50 years of retirement allows you to now spend $30,000 a year until it goes to zero. This way, you are hedged every which way but Sunday. By mentally preparing for a shorter life, you do everything possible to make sure you achieve financial independence sooner, rather than later.
Even if you don't achieve your number at the age you wish to walk away, you should know that a new life begins regardless, and you will be able to enjoy everything you've ever wanted to do but couldn't while working. Your draw down allows you to live to 100, and yet still likely have enough money left over for your children.
There is never enough money to accumulate, so you might as well set an age and walk away (regardless of whether you've reached your financial goals). With a truncated time frame, one mentally clamps down and becomes a financial samurai, not wastefully going into credit card debt, buying cars that cost as much as yearly salaries, and lusting for dream houses despite having an insufficient down payment saved. An admirable ratio to shoot for may be 2 years of work for every 1 year of retirement. Personally, I'm shooting for a ratio of 1:1!
Unless you're one of the lucky few who absolutely loves what they do, you aren't going to wish you worked more when that time comes. Even if you live longer than average, is it not enough to make do with less, and count your blessings every year beyond the statistics? Don't let life blindside you and leave you wondering where it all went. Choose an age to retire, never stop enjoying life, and know that in the end, you never let money control your destiny.
Readers, why do you think it is so difficult to just walk away from work if you've saved enough to retire? Are there not hundreds of other things you'd rather do than work? What are the main fallacies to the argument of retiring at a certain age, rather than after a certain number? Some people may never reach their number, and may have a better chance at reaching a certain age. Wouldn't the age goal be less stressful than a monetary goal?
This is a guest post by Financial Samurai — Slice Through Money's Mysteries:
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