I suspect everyone daydreams about what they would do if
they didn’t have to worry about a paycheck. You may be asking, “How do you, Ted, get to live this
daydream?” Four reasons: the first
we had no control over, the other three we did.
No control
1.
Both my wife and I had prosperous and generous parents. No question, this has been a major
reason I have this opportunity. Still, we could have squandered
this advantage had we not done the following three things as well.
Under our control
2.
We lived below our means. When we got married (in 1977 while in graduate school), my
wife had some money left over from that saved by her parents for her college
expenses. We put these funds into
a money market account (relatively new in the 1980s) and called it our “rainy
day” fund. We did not touch this
except for emergencies or investments (eg, a house down payment). In doing this, we learned a valuable
lesson – just because you have money doesn’t mean you have to spend it.
Physicians are unfortunately prone
to errors in this regard, as discussed in this recent NYT article by Ron
Leiber.
YOUR MONEY | August 27, 2011
By
RON LIEBER
They take eight or so years off from the world
to do nothing but learn how to be doctors, then receive a six-figure annual
paycheck with no real idea of what to do with it.
3.
We minimized our debt. This is related to #2.
If we could not afford it, we did not buy it. We paid off our credit cards in full at the end of the
month. A little over a year ago, we sold
our home to move to the parsonage of the church my wife leads (North
Ferrisburgh United Methodist Church).
We needed to be near the church community for her work, and our youngest
son was about to graduate from high school. And it is a neat old house with a lovely porch. This
eliminated our one remaining debt – the mortgage.
4.
We started saving as soon as possible. We started our first retirement
savings when I was an intern in 1981, and rarely has a year gone by that we did
not contribute to our retirement accounts. We have experienced the “miracle of
compound interest”. Our investments were in mutual
funds with an eye towards diversification, while minimizing costs.
I made one major move in 2007 that
was providential in hindsight. I switched half of our 403b accounts from
equities to bonds. However, I
wasn’t trying to time the market, rather I knew I needed greater diversity at
my age. In 2008-09 when the market
crashed, I didn’t sell anything or change my distribution plan. Instead I kept investing in both equities and
bonds with the dollar cost averaging approach implicit in bi-monthly
contributions to 403b accounts. I
also made additional investments in equities through IRAs in early 2009. We’ve
done fine, and I don’t let the daily ups and downs of the market (more
exaggerated recently) concern me much.
General approach to finances from here
Our approach from here uses a “bucket system” to smooth out
our spending over a projected life span of 99 years. We have
“non-retirement” assets that generate some income, but which I intend to gradually
deplete over time. Within this bucket (as in our retirement accounts) we are
diversified in cash, bonds, and equities.
Our next bucket is our retirement assets.
We will only tap our social security when we reach the maximum age to start
distributions, which will ensure the largest per month amount of payment. What if neither of us lives much longer
than 70? So what? We won’t care – we'll be dead. The biggest risk in retirement is to
outlive one’s financial assets, not failure to maximize social security returns
if you happen to die early.
Therefore, unless you have a terminal disease, its best to plan on
living a long time.
My guides for this approach have been many, but the primary
teacher has been my father-in-law, Jed Hornung. It’s interesting to read written sources, but I am always
somewhat skeptical. We only take
advice from people who are paid by the hour and who are not on commission or
have something to sell. The two
books that I would recommend, with some reservations, are the following. No, I am not paid to recommend them – I
am not trying to make money by blogging.
I
Will Teach You To Be Rich by Ramit
Sethi (Mar 23, 2009) A book written in an engaging style for “20
somethings”, but with a number of wise points about saving and spending
money. It’s more about starting out than
retiring, but for those who are trying to work on the approaches of 2, 3, and 4
listed above it is pretty good, and fun to read.
Spend
'Til the End: Raising Your Living Standard in Today's Economy and When You
Retire by Laurence
J. Kotlikoff and Scott Burns (Jan 5, 2010) This is more to the point for those considering
“reinvention” and reduced incomes.
Written by a Boston University economist and a columnist, they have a
program (which I’ve used) to figure out how you could smooth out your
consumption of funds over a projected (long) life span with a given amount of
assets taking into account inflation, interest, dividends, taxes, planned
costs, etc. I don’t buy the very
conservative suggested approach of having only TIPS (Treasury Inflation
Protected Securities), but there are other very interesting concepts and
strategies, particularly regarding social security and just the concept of
“consumption smoothing”.
So, that is why I think I can do this. If you start to see ads on this blog,
you’ll know I was wrong.
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