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.
Too Young
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.
Gin Rummy
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.
Conclusion
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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Absolutely. In the long term we will all die. Making a fortune and not enjoying your life is the biggest risk I can think for.
Live within your means, create a passive income stream(some business which does not need your attention all the time)and invest aggressively. And then live the stupid corporate jungle and do what you love to do( it even may be some work which can bring some money to the table, provided you love it).
Also make sure you enjoy your life and have fun even when you are working. Because you never know if you will live tomorrow.
Like you, I'm doing my best to live within my means and get out of corporate America. The safety of the 'golden handcuffs' (paycheck, medical benefits, 401k, etc), isn’t getting me to my financial freedom, however.
I spent my 20s getting out of debt. In my 30s, I worked for corporate America making a mediocre salary and saving what I could. Now in my early 40s, I'm completely debt free but I don't own my own house. I still work for corporate America, but doing what I can to climb down the corporate ladder! Simultaneously, I’m taking specific action to generate income through semi-passive avenues. I don't know any way to make money truly passive at this juncture without risk -- but I'm willing to learn!
The most important factor in my life right now is that I stay in the moment and enjoy today.
Here's how I'm doing it:
1. Sold my house and moved to the Carolina coast because that's where I want to live
2. Identify a niche in my new home town that I can fill and create a business that I think I will enjoy doing (event planning).
3. Start writing freelance. My first writing project is for a pre-paid debit card, Mango Money. With this writing gig, I can earn extra money monthly but also become more disciplined in managing my monthly budget with their product.
As I build up my new event planning business and earn money through writing, I hope to wind down the corporate job. Step by step.
I'm taking a leap of faith so that I can live the life I want to create today, not when I retire. Unlike this article, though, I don’t think I will have a nest egg built up enough in 7 years when I’m 50 .
All my best,
Kim
Congrats for being completely debt free and selling your house! You said it, regarding "living the life you want to create today, and not when you retire." It's all about balance, and all too often in corporate America, we lose site of things because we're so stressed out working like dogs. I've got to work on that balance, and i've planned to finally use at least 75% of my yearly vacation days.
Your goal to make some side income through writing sounds great. It's so funny b/c I think a lot of us have a lot of good stuff to say. It's just that we lack an audience. Thank goodness for online media and social networking sites to help us small timers out. Linsey at Wise Bread has been great to listen to some of my ideas, and I hope you find your own Linsey in your particular field of writing!
Best.
Keigu,
Financial Samurai
"Slicing Through Money's Mysteries"
Leaving an inheritance of some sort is a goal for many people with children.
I would love to check out and leave my kids enough money to put their kids through college.
When I was growing up, my father told me that the best inheritance he could give me was a good education. He sent me to a good college. He also introduced me to various teachings about life. My father passed away many years ago, but what he taught me about life and the school education I received have helped me through every turn in my life. I must say that I would not worry about leaving my children enough money. I would just do the same as my father did, giving my children any opportunity possible to learn about life, and encouraging them to receive a good school education. I would let my children decide for themselves about what they want to do for living and how much money they want to make before they retire. I would give them advice if sought after. Otherwise, I would just enjoy my retirement thereafter.
Leaving residual wealth to your loved ones is the catch-all. The debate then becomes, how much inheritance is enough, or too much.
Warren Buffet's kids aren't getting billions because Warren Buffet donated everything to Bill's foundation (Warren is the man!). The kids will never be poor, but as a percentage of Warren's wealth, the kids are getting a pittance.
I believe most people who can focus on their finances very early, and consistently for 30 years will be able to leave wealth to their kids, and still have money left over. The problem is its hard to know our life expectancy.
The balance is to then figure out how to consistently spend a balanced amount of money over one's lifetime, and not run out. But, I think we're too focused on money as a society, and not focused enough on just living.
Thanks for sharing your thoughts!
Keigu,
Financial Samurai
"Slicing Through Money's Mysteries"
Who is making $90,000/year from the time they are aged 20-50?
Also, this does not take into consideration the costs of assisted living, should that become necessary, which it often does. My husband's grandmother was paying $6,000/month just to live in a comfortable facility, before her savings were dwindled enough that she moved in with her son, and she's relatively healthy. A person is expected to support themselves until their net worth is nearly depleted, and then they may be ending up in a not-so-nice living situation.
I'd rather be safe than sorry, and leave any remnants to my kids.
Guest - $90,000 is just a number. It can be the US median of $45,000 a year, or $1 million a year. 28-29 year old kids out of business school are earning $100-140,000/yr according to US News & World Report. Oakland Dockworkers are making $100-160,000/yr in "Fortunes, Fortunes, Everywhere." Meanwhile, over 448 San Francisco City workers make over $100,000 a year, and they aren't even working! The point is, there's NEVER enough money, so why bother after a certain age?
You are absolutely right wrt to health care expenses, the topic du jour for all of us nowadays. Finger's crossed we all live healthy lives, have long term care insurance to pay for these expenses, and have at the very least, a government to do something about ridiculous healthcare costs!
I'd rather be safe than sorry in living a full life, rather than spend my entire life just trying to make one more extra dollar after a certain age. No rewind button in life!
Thnx for reading and sharing.
Keigu,
Financial Samurai
"Slicing Through Money's Mysteries"
I don't ever want to be controlled by money. I saw what money did to one immediate family member, and I promise I will never let it get the best of me.
I might not have enough money in 20 years when I'm 50, but I'm sure as heck going to do my darndest to try and get there!
I would like to have enough money someday to be able to volunteer, but I can't imagine not having "a job." It's how I define my life, I enjoy it, and I can't imagine ever stopping.
If you’re trying for a 1:1 work:retirement ratio, how do you guess years in retirement? Is it different if you come from a long-lived family?
People in my family live into their mid eighties, and my health is above average for my family. So if I live to be 90, then since I started working at age 17, does that mean I retire at 53? Or since I didn’t start working full-time until age 27, does that mean I can’t retire until age 58?
I’m not in credit card debt, my house is half the median value of houses in my area, and my cars are about 15% of my yearly salary. Does that mean I get to retire now? If so, all I have to do is learn to live on $200/month. With that money I could eat every day and even buy ibuprofen and band-aids. I could hang out at the library reading and web surfing all day, but I was sort of hoping to sleep indoors.
Actually, if I cash in my pension, I could have $400/month. But even if my house were paid off and I kept a roommate, that would barely cover my taxes, insurance, maintenance, and utilities. I guess I don’t really need insurance or utilities (besides water). I’d rather have food.
The problem is that I want a much more luxurious retirement. I want shoes. And I like to watch movies. And I like to go places that aren’t walking distance. And if I got an expensive illness or injury, I’d really like a chance to have that fixed up.
That said, I do actually have an age I'm aiming for rather than a number: it's the age at which I'm eligible for my pension if I keep working for the same employer and they don't change the pension rules. I'm saving extra in case they change the pension rules, but I can't quite save enough extra to switch employers.
Debbie,
If you are going to get a pension, that's fantastic. It's funny that demographic experts say that the highest group of savers are actually the 24-32 year olds because they don't believe they will have pensions or social security to help them out in the future.
I believe things are pretty rational. If you like your job, and want a more luxurious retirement, then work as long as you can. Many others hate the job their working at, but have to do it out of necessity.
Sounds like you are living quite frugally, which is great. How do I shoot for a 1:1 ratio? Just simple math really... work no more than 30 years after college, "retire" for 30 years and call it a good life at 82 :) Every year beyond 82, I will count as a blessing. As I said in my post, I will bank on 100 to be conservative wrt to my spending, but don't expect to get there!
Retirement to me does not mean do nothing. Instead, it means do EVERYTHING i've always wanted to do but couldn't b/c I was stuck working!
Thanks for sharing your thoughts Debbie!
Keigu,
Financial Samurai
"Slicing Through Money's Mysteries"
I left Wall Street 2 years ago after being a corporate rat for 15 years, with plenty of sleep deprivation to show for and no time to enjoy the money I earned. I slept about 3 hrs a night and every vacation I took I worked thru it. So I "retired" myself and since then got my 8 hrs of sleep, hit the gym, travelled the world over, read and wrote a lot, reconnected and bonded with friends and family, so in short, I regained my life.
I have loved every moment of my "retirement" thus far, inspite of the economic crisis. But because of the crisis, my former clients who are significantly older than me all told me to go back to work, that I am way too young to retire, that I should work for another 20 years to replenish my nest egg. There are days I do wonder if retirement is all that cut out to be as I was always validated by my work. And I do wonder if I shouldn't be working for the next 20 years just to make sure I have enough cushion should I live to 99 (my paternal grandma is 99, my maternal grandma lived to 99, and my mom is 74 and more fit than me, God blesses them)?
My temporary conclusion is that there is never a good time or a good number to decide on one's retirement. For me it was a combination of timing, circumstances and desire, and having started working at age 12 and always lived below my means, I felt it was a good time to get off the treadmill for a while. I don't know what my next chapter will look like yet, but I know I want to be productive but I would not trade a quality life style for money, I just want to earn enough to cover my burn rate and health insurance coverage should I live to 99!
In 15 years on Wall Stree, you surely socked away much more than the average worker making $35,000 per year working for 40 years, right?
One is not ~poor~ and still "travel the world over" even on a budget...
Just pondering it.
This is really inspiring! Life goes by too fast & I don't want to be stuck chasing after a number into my late 60s. Setting an earlier target is motivating to work hard now and reap the rewards sooner. I tend to get distracted with things and procrastinate so moving up my retirement age will keep a fire under my pants so I won't waste time & will instead stay focused on finding ways to save and earn more money now. :) Thanks Financial Samurai.
Apprentice For Life,
Thanks for sharing your thoughts! Awesome! I'm very envious you were able to retire after 15 years on Wall St. It sounds like you are having a GREAT time and enjoying every minute of retired life.
Just thinking of working for 20 years after you've already worked for 15 years on Wall St. sounds tiring. Maybe strike a balance, and take several more years off to make it 5 years, and then jump back in for 5 years to buffer your retirement fund. Sounds like you will be well paid if you jump back in given your experience.
Hope you live a healthy life until 99!
Keigu,
Financial Samurai
"Slicing Through Money's Mysteries"
What a lot of people seem to assume about "not loving life" is that once you're dead, it doesn't matter how much you "loved life". You're dead. Period. End of story. If you spent 40 years making $1 million and die, it's no different of an ending than if you spent 40 years in debt and died $1 in the hole.
So now that we are talking about death... it's interesting to note that the Japanese who committed suicide when they couldn't pay their mortgages in the last downturn saddled their next generations with their burden. They have multi-generational mortgages!
Your point is well taken, that's why I wrote, "Does Bernie Madoff WIN In The End? I think the answer is yes to the detriment of his victims.
Bernie may have done more for American society than we all think. Lotsa little Bernies running around emulating his plans of trickery.
Keigu,
Financial Samurai
"Slicing Through Money's Mysteries"
Real wealth is achieved through a life-time of learning. We've made a lot, and lost a lot in this economy. We're on the mend now.
It's hard to walk away even at 50, because there's always a fear we will never have enough and die broke. Funny thing is, I'd argue that if one has kids, there would be less fear b/c one's family will always take care of each other.
Thanks for sharing your thoughts FS.
I don't know whom to credit for this, but it's one of my favorite quotes:
"John D. Rockefeller was one of the richest men in the world.
And now, with sound financial planning,
he's dead."
You touched on it in the conclusion, but the most important thing is to be totally debt-free when you "Walk Away." This means: no mortgage, no car payments, no credit card debt, no bills whatsoever. I retired at 59, after selling my business, and it is so much easier to enjoy life when you have no debt.
The other thing, of course, is health care. I have the advantage of having health coverage through the buyer until I reach medicare age, but hopefully there will be some plan in the near future that gives early retirees the ability to get affordable health care.
Once you retire, you have time to figure out how to do things and enjoy life without spending a lot of money. If you're not saddled with ongoing payments, you can really enjoy life very cheaply.
Hi Karen,
Thanks sharing your thoughts and congrats for retiring by 59! That's a great accomplishment. Having health care and having no debt sound like two of the most important variables.
If we have no debt, and have health care coverage..... how much do we really need to enjoy life? I would peg the figure at around $30,000-$50,000 a YEAR in today's dollars, and that's living in a big city like San Francisco for me.
Life is so cheap without debt. I just got back from playing a league tennis match in the park, and all it cost was a $2 dollar can of balls! Do a little writing here and there, play some hopefully competitive tennis, read a library book and spend time with loved ones doesn't cost that much at all.
Keigu,
Financial Samurai
"Slicing Through Money's Mysteries"
i guess i am one of those lucky few who absolutely loves what they do. i think i am going to do this as long as i can or until i get bored. as for the death part, i have no idea why people dont like talking about it. it is as inevitable as taxes but most(read the young) think that they are immortal and thus make no plans whatsoever with their finances or health or any other important thing and then when the bloom of youth wears away the sad reality strikes that they are indeed mere mortals. it is strange but i think about death very many times and there is a way that that it keeps me on my toes.
ps;great post btw
Hi Kenyantykoon - Thanks for sharing your thoughts. It's absolutely wonderful you love what you do. I don't think the majority of people can say that. "Like" maybe, but not love.
Keigu,
Financial Samurai
"Slicing Through Money's Mysteries"
Follow Me on Twitter @FinancialSamurai
Wow, I'm jealous to hear that you say you 'love' what you do. I have to say that the moonlighting writing gig I'm doing for Mango Money is a lot more creative than my day job. I can honestly say I'm having fun with it!
Yesterday I wrote on my Facebook status, "I love my job, I love my job, I love my job..." as if a mantra will change how I feel about it. My friends all sarcastically responded 'Yeah right!' They know me way too well ;-)
So, I'm working on an exit strategy from my full-time job to working freelance. My living expenses are intentionally at an all time low so I've properly prepared for the transition. What I can't figure out though is medical benefits. Sure, I could buy insurance but I have so many pre-existing conditions that it would be useless to me.
COBRA is an option for 18 months, but then what? I wish group insurance would somehow be portable. If medical insurance wasn’t an issue I would be much more aggressive in making a career change!
All my best,
Kim
It would be great if we all just LOVED our job, and that's what part of this article tries to address. I'm pretty sure most people have tons of things they'd rather be doing than working.
Obama will implement Universal Healthcare within 4 years, so don't worry! We'll all be able to kick back and have the working folks pay for our premiums. Ouch, that's controversial! :)
Keigu,
Financial Samurai
"Slicing Through Money's Mysteries"
I've been fortunate - part owner of a couple successful companies, about $1.5 mill in personal liquid investments, own 3 homes free and clear, no other debt. I enjoy parts of my job but don't 'love' any of it. During stressful periods at work I think about chucking it all and retiring. I will be turning 50 next year -- could be time to make a change. Thanks for the excellent article.
If you don't love you're job, have no debt, own 3 homes free and clear, and have $1.5 million in liquid investments, whatcha waiting for?! :) There has to be SOMETHING other than what you are doing that you've always wanted to do and feel more passionate about.
Go for it!
Keigu,
Financial Samurai
"Slicing Through Money's Mysteries"
Follow Me on Twitter @FinancialSamurai
You gave very good advices! I probably would have worked much longer if I had been doing what I loved to do. Unfortunately, I wasn't as lucky. So, eventhough I had a good job, I decided to retire early.
I have been enjoying life since, especially after I finished taking care of some family things that I wasn't interested in doing but would be good to get them out of my mind.
I'm so happy you retired early, are loving life and attending to your family needs!
Way to go!
Keigu,
Financial Samurai
"Slicing Through Money's Mysteries"
I spent the first few years of retirement doing what I was finally able to do once away from the desk. Turns out drinking full-time was one of the things I should have passed on. Now with about 1/3 of the nest egg I started with, I'm finding that there is a lot to like in retirement, but I'm finding value in stuff I didn't see before.
I've made a few incredible friendships, read a lot of used books, watched about all the TV I need for a while. So now I'm back in school, pursuing a new career in green energy and sustainable building practices (solar, LEED, etc.) This is a field that has enthralled me for decades -- I had no idea I could actually be a part of it!
I'm still spending more than my social security, but each year I get closer to living within my anticipated means. At the same time, I am enjoying what I do a lot more. Cooking is now an all day affair -- bread and stews and such from scratch, etc.
I compete with myself now, not the co-workers or people from other corporations. I accept failure as an inevitable bump in the road, not the end of anything. I would not have envied a person in my state when I was approaching retirement, but I now pity people who feel they have to live the way I was.
Don
Don
I'd love to know how the pursuit of green energy business has worked out b/c it is something that I have thought about for years as well and I am sure where to begin. Is there a way to contact you directly?
What great insight. thnx!
FS,
On your post talking about time accelerating as you get older, I look at it like the following:
When you are 5 years old, the elapsed time of one year is 20% of your life experience, in years lived. When you are 50 years old the same 1 year is 2% of your life experience... in this way time 'accelerates' for all of us when we get older.
-Mike
Yup, we do the same calculations. Better make the most of things!
"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."
Keigu,
Financial Samurai
"Slicing Through Money's Mysteries"
45 years old this week, wife is 51. We have 2.2 million in cd's at about 4.2% No mortgage, kids college paid off. No credit card bills. $300 k in retirement. Are we too young. We live rather cheap and have worked our butts off! Any life advise or money advise would be great
Thanks, PL
I'd hate to see something happen to you or your wife before you're able to really spend and enjoy your money.
Live a little and stop working your butt off! :)
Keigu,
Financial Samurai
"Slicing Through Money's Mysteries"
Sam,
Your financial advice is great. In the other hand, I think you are suggesting to start to live life after retirement.
We have to start to live right now, and a condition for this is to do what we love every single day. We always will have the money and the time to do anything that we really love!
(More about this subject in my site)
All the best,
Boris
This is SO true. I know on person is a big investor in my family, and all his money is tide up in long term investments. He is not living his life at all right now because he wants to save it all for retirement so he can live then, but you make a valid point... what if he doesn't? We all need to save money for our retirement, but we also have to remember we should live each day to the fullest. Any one of us could die tomorrow, so lets enjoy today.
For this reason, I will not invest in long term investments. I only like short term investmnts that allows me to make quick profitable gains--such as penny stocks. Since I have subscribed to a newsletter provided by www.hototc.com, I have began to profit almost 300% a week on my small investments. And it is great because it allows me to increase my wealth, save more, but still allows me to live my life because I do not have big funds tied up or at risk.