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ronaldmrashid · 7 years ago

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The Ideal Financial Scenario In Retirement: Conservative Returns, Steady Income

Financial loss creates stress. And given stress kills. your goal as a retiree should be to remove as much stress from your life to live as long and happy as possible.

Recently, I’ve been thinking about being OK with no longer making a lot of money from investments. With such huge returns in the S&P 500 and the SF real estate market since 2012, I kind of feel like Anthony Bourdain when he said,

“I should’ve died in my 20s. I became successful in my 40s. I became a dad in my 50s. I feel like I’ve stolen a car — a really nice car — and I keep looking in the rearview mirror for flashing lights. But there’s been nothing yet.”

I got in trouble the summer before starting college and could have easily given up on my future. But in college, I met my wife and landed a hard-to-get job for someone with my lack of pedigree.

Two months before likely being terminated at my first job as the internet bubble burst in 2000, I was able to find a new job in San Francisco for a raise and a promotion.

Instead of selling a home close to the bottom of the market in 2012, I was blessed to have a lackluster agent who couldn’t sell a beverage to a parched traveler in the middle of the Sahara.

Instead of flaming out with Financial Samurai and having to go back to work a couple years later, this site has become a viable source of income to support my family.

Sure, there have been plenty of setbacks as well, but I’ve chosen to focus on the positives because life is better this way.

With low returns and a stable income, life becomes magnificent in retirement. All the worry about running out of money or having to go back to work full-time starts to fade away.

Conservative Returns And A Steady Income

Anybody who has been reading Financial Samurai since 2009 should be much wealthier today. And if you are the Financial Samurai, then you’ve also done well. Thus, when I think of de-risking over the next several years, I don’t see it as quite the atrocious move that some make it out to be.

Everybody is at a different financial stage in life. I’m not sure why we have to project our stage onto others as the only right way. For those who are looking for ways to de-risk or profit during a downturn, I’ve presented some logical ideas to consider. I’m sure there are many more, like selling out of the money call options.

It’s obvious that in 30 years, the stock market and real estate market will be higher than it is today. Just by the Fed having a target 2% inflation rate tells you that assets will continue to go up by at least 2% a year over the long run.

In 30 years, I’ll be in my 70s, wistfully reflecting on all the years gone by. Sure, if I had stayed the course and continued to aggressively invest in risk-assets and never spent a dollar of my gains I’d be wealthier. But would I be happier? Probably not. Would I be disappointed for losing 20%, 30%, 50% of my investable assets in the second half of my life when I could have conservatively made 3% – 5% a year, forever? Absolutely.

I’m stuck with a frugal mindset that makes it impossible to spend more than 50% of our income or ever draw down retirement principal. When my wife and I die, we know we’ll be donating or passing down the majority of our wealth to our son. Therefore, inviting unnecessary money stress due to excess risk taking at this point is our lives is illogical. It’s illogical for anybody who has reached financial independence.

Related: Various Portfolio Compositions To Consider In Retirement

Stress-free Wealth Creation Feels Great

Action item: I’d like everyone to calculate their annual gross income, net income, and absolute savings amount and divide them by your current net worth. You now have a good idea of your minimal annual net worth growth rate assuming a 0% investment return.

My percentages are roughly 10%, 7%, and 5% respectively. In other words, I’ve got a 30% effective tax rate, save half my gross income, save 70% of my net income, and am able to grow my net worth by about 5% each year from savings alone. I could probably increase that figure to 6% if I really cut costs. But I’m trying to kick my frugal habits now that I’m over 40.

For the sake of illustration, if I dump my entire net worth into a 10-year treasury bond yielding 3%, I’m now growing my net worth by 8% each year.

At an 8% growth rate, in nine years, I will have doubled my net worth. In 18 years I will have tripled my net worth. And in 27 years, I will have quadrupled my net worth with very little risk or stress. How is this not an awesome return?

A 5% net worth growth rate based on my current income isn’t impressive. Some of you are probably able to grow your net worth by 100%+ each year through your income and savings. But don’t feel sorry for me. I’ve found a happy place where I’m satisfied with the amount of risk, reward, and effort required to maintain such a growth rate.

Of course, your income might decline or go away. But hopefully, you will have built passive income streams, receive a pension, or earn social security income so that there’s always some form of income coming in. In my case, it’s passive income and online income until social security kicks in 30 years from now.

Examples Of Being OK With Low Returns

Here are three realistic examples of retirees with steady incomes and low investment returns. They’ve all decided to take things down a notch because their annual expenses are fully covered without needing to work full-time. They have paid off homes and never have to draw down principal to fund their respective retirements either.

Example #1:

A 63 year old couple who lives in Des Moines with a paid off house and an annual budget of $34,000.

Net worth excluding primary residence: $500,000

Social Security Income: $18,000 (3.6% of net worth)

Dividend income: $10,000 (2% of net worth)

Annual net worth growth: $20,000 (4% capital appreciation)

Total available gross income/capital: $48,000 (9.6% annual growth)

Example #2:

A 45 year old couple who lives in San Francisco with a paid off house and an annual budget of $240,000.

Net worth excluding primary residence: $5,000,000

Passive income: $140,000 (2.8% of net worth)

Part-time consulting: $60,000 (1.2% of net worth)

Annual net worth growth: $250,000 (5% capital appreciation)

Total available gross income/capital: $450,000 (9% annual growth)

Example #3:

A 67 year old couple who lives in Manhattan with a paid off condominium and an annual budget of $350,000.

Net worth excluding primary residence: $10,000,000

Passive income: $250,000 (2.5% of net worth consisting mainly of dividends)

Pension income: $120,000 (1.2% of net worth)

Annual net worth growth: $400,000 (4% capital appreciation)

Total available gross income/capital: $770,000 (7.7% annual growth)

If The Direction Is Correct

Below is a recommended net worth growth rate chart by age to consider. When you’re just starting out with nobody to care for but yourself, you should be experiencing tremendous net worth growth each year. You’ve got plenty of time to make up for errors or investment losses in your 20s.

Even though your earnings power grows in your 30s and 40s, your net worth growth rate will likely slow as your net worth and expenses grow. This is the sandwich age where you may be providing for children and taking care of your parents.

Hopefully by the time you reach 50, your net worth will be at least 20X your annual expenses. As soon as you get to 20X annual expenses, you can start considering downshifting or leaving an undesirable job altogether. If you can get to 20X your annual expenses at an earlier age, all the better.

By the time you have your “enough money,” there’s really no need to shoot for greater than a 5% annual return. If your net worth is indeed 20X your annual expenses or more, simple math dictates you can live off your net worth forever and never touch principal with a perpetual 5% return.

My favorite Chinese proverb is, “If the direction is correct, sooner or later you will get there.” You are welcome to take more risk to expedite reaching financial freedom. In fact, I encourage you to take all the risk in the world in your 20s or before you have a family.

I’ve always had a minimum net worth growth target rate of 10%. Thanks to a strong recovery and this site, my net worth growth rate has been higher since I left full-time work in 2012. But after not seeing any lights flashing in my rearview mirror for so long, I’d like to keep it that way by dialing down risk.

Recommend Net Worth Growth Rate Targets By Age

How Does It Feel To Be Financially Independent?

https://www.financialsamurai.com/wp-content/uploads/2018/06/The-ideal-financial-scenario-in-retirement.m4a

Readers, how much is your net worth getting boosted by your savings each year? What’s the point of taking so much risk if you already have enough to be happy? Is it really wise to just stay the course forever and never spend any of your investment money? If so, what’s your purpose of investing?

The post The Ideal Financial Scenario In Retirement: Conservative Returns, Steady Income appeared first on Financial Samurai.

from https://www.financialsamurai.com/ideal-retirement-scenario-conservative-returns-and-a-steady-income/

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lotsofdogs · 7 years ago

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The Essential Seven: Creating Habits That Lead to Happiness

If you’ve been reading this blog for a while now, you’ve likely picked up on the fact that I am a big fan of the author Gretchen Rubin and her best-selling book The Happiness Project. Since the success of The Happiness Project, Gretchen released a handful of other books that touch on happiness, habits and understanding the way your personality and the way you’re wired impacts your happiness.

Along with her sister Elizabeth, Gretchen also hosts a podcast called Happier that I’ve mentioned on the blog a time or two. It’s awesome and the episodes are short, easy to listen to and often leave me with a little tip or trick I want to apply to my life to try to increase my personal happiness. Gretchen approaches achieving happiness in an easy yet methodical way and gives insight into seemingly small things we can do or implement in our lives that may result in a surprising amount of joy.

Earlier this week, I listened to the Happier podcast (episode 90 if you want to check it out) and Gretchen and Elizabeth discussed what Gretchen deems “The Essential Seven,” or seven habits that most impact our happiness.

Gretchen is HUGE into creating good habits and firmly believes that creating positive, lasting habits is essential when it comes to living a happier life. She says, “We can use decision-making to choose the habits we want to form, use willpower to get the habit started, then—and this is the best part—we can allow the extraordinary power of habit to take over. At that point, we’re free from the need to decide and the need to use willpower.”

We all know the habits we WANT to have in our lives. Healthy habits, responsible habits, habits that make us feel more connected, valued and successful. Gretchen breaks down habits into seven categories and in Episode 90 of the Happier podcast, she and her sister speak about something they want to change or begin doing related to each of The Essential Seven habits to increase joy in their lives. I found myself thinking about what I wanted to change or focus on in my life after they discussed each of The Essential Seven habits and ended up creating a mental list in my mind that I thought might make an interesting blog post.

The Essential Seven

Here are The Essential Seven, taken directly from the Happier podcast notes:

Eat and drink more healthfully (give up sugar, eat more vegetables, drink less alcohol)

Exercise regularly

Save and spend wisely (save regularly, pay down debt, donate to worthy causes, make purchases that contribute to happiness or habits, pay taxes, stay current with expense reports)

Rest, relax, and enjoy (pursue a hobby instead of cruising the internet, enjoy the moment, stop checking email, get enough sleep, spend less time in the car, take time for myself)

Stop procrastinating, make consistent progress (practice an instrument, set aside two hours daily for uninterrupted work, learn a language, maintain a blog, keep a gratitude journal)

Simplify, clear, and organize (make the bed every day, file regularly, put keys away in the same place, recycle, give away unused clothing)

Engage more deeply—with other people, with God, with yourself, with the world (call family members, read the Bible every day, volunteer, spend time with friends, observe the Sabbath, spend time alone in nature)

Now let’s discuss! Below I’m breaking down The Essential Seven and sharing a little bit about one tangible thing I’m planning to do in my life to address the habit and hopefully increase happiness.

Using The Essential Seven to Create Habits that Lead to Happiness

Eat and Drink More Healthfully

My goal: Reduce consumption of refined sugar by limiting dessert to once or twice a week

When Gretchen and Elizabeth discussed this habit, Elizabeth identified nighttime snacking as her biggest health-hindering issue. For me, it’s sugar. I know this without a doubt. I’ve mentioned it briefly on the blog before, but sugar is something I struggle with because I tend to not only crave it every day, but I also use it as a way to celebrate, connect (Ryan and I LOVE picking out new ice cream flavors to try together), distract (I’m totally guilty of baking as a form of procrastination), make myself feel better (my sugar consumption definitely goes up when I’m feeling more emotional) and the list goes on and on. I have zero desire to completely give up sugar because I like it and things like ice cream, cake and cookies make me happy. The pitfall is when I find myself eating too much sugar so it negatively impacts my happiness.

I’m sure some of you know the feeling of the sugar crash that comes when you’re left feeling tired, blah, bloated and just plain crappy. This tends to happen to me more when I eat larger amounts of sugar many days in a row. I don’t usually feel bad if I eat a bowl of ice cream one night but when I eat ice cream one night followed by more ice cream the next night and a cookie at lunch, etc., I begin to feel the negative effects. My current goal of reducing sugar consumption by limiting dessert to once or twice a week seems attainable to me and doesn’t make me feel sad the way I would if I think about eliminating the treats I love so much from my diet completely. I actually really like the idea of trying to get a handle on my sugar cravings by trying Whole30 at some point (SO many of you highly recommended it when I last talked about sugar cravings) but right now I think this is a good smaller step for me.

Exercise Regularly

My goal: Take 10 minutes to stretch every day

I feel fortunate to really enjoy exercising and it’s already a part of my routine but I know I could always benefit from more stretching. Whether it be taking myself through some of my favorite hip stretches at the end of the day, foam rolling, doing a 20-minute yoga flow at home or simply carving out 10 minutes after my workout to stretch, I know my body (and mind!) would benefit from a little extra stretching. I’m setting 10 minutes as a goal for myself because it feels realistic.

Save and Spend Wisely

My goal: Get back into meal planning and grocery shop with a list and a plan

My finance-savvy husband tracks our monthly spending in various categories which is something I personally find incredibly tedious but SO interesting. I’m glad he does it because it makes it easy to see when certain categories jump on a month-to-month basis. Food is one of our biggest areas of spending and the difference in our monthly food expenditures when I take the time to meal plan versus when I don’t is more dramatic than I would’ve anticipated.

Multiple trips to the grocery store add up, especially when you factor in impulse buys or take-out on nights when you feel like you don’t have anything good at home to eat. When I shop with a plan, I spend less, feel more organized through the week and our food waste goes down. It’s a win-win situation and a habit I’m actually looking forward to getting back into, as you may have seen in yesterday’s blog post! Quite a few of you requested more meal planning/dinner ideas in future blog posts which I was excited to see not only because they’re fun to write but I think they’ll also keep me accountable.

Rest, Relax and Enjoy

My goal: Take Sadie on a solo walk once a week

Last week, I took Sadie on a walk by myself and it was amazing how much better I felt after our walk around the neighborhood. Don’t get me wrong – I absolutely LOVE family walks – but Chase is getting more and more restless in the stroller these days so walks with him and Sadie often feel a little hectic as I try to find a snack, a book or something to point at along the way to keep him happy/entertained. Walking alone with Sadie felt peaceful and allowed me to focus on the beautiful weather and how good it felt to simply move my body while I listened to my favorite podcast (Wait, Wait Don’t Tell Me). I’ve said it many times before but watching Sadie have a blast on a walk and seeing her get the biggest kick out of simple things like sticks and squirrels also serves as the perfect reminder to me to enjoy the little things in life.

Stop Procrastinating, Make Consistent Progress

My goal: Work first, email second

My email completely overwhelms me. My inbox is horrifying and I struggle to keep up with the number of emails (literally hundreds) I receive every day. I could easily spend my entire work time on emails every day but that’s not the best use of my time, nor is it fun or productive. When I sit down at my computer first thing in the morning or during Chase’s naptime, I will often open up Gmail and begin sorting through emails. While I’m responding, deleting and sorting through everything, I can practically feel my creative energy dying a slow death. I’m hoping that by making myself work before I check my emails, I’ll be more productive and excited about the tasks at hand rather than beginning my workday feeling behind and drained.

Simplify, Clear and Organize

My goal (personal): Organize, sort and store Chase’s baby clothes

This one is haunting me every time I open Chase’s closet in his nursery. I need to carve out some time to sort his clothes and box everything up that’s too small so his baby clothes are no longer mocking me from a giant folded heap in the corner of his closet.

My goal (work): Create an “Upcoming Partnerships” bin and a “Completed Partnerships/Invoice Due” bin in a visible spot in my home office

Through the blog, I feel fortunate to work with a myriad of companies and brands but since I’m just a one-woman show, it can feel very overwhelming at times to keep all of my partnerships in line. I work with brands a variety of ways (sponsored posts, social media shares, freelance content, etc.) and while I have all of my deadlines in front of me on my desk every day, once I’ve completed the task at hand, I find myself looking toward the next deadline and occasionally forgetting to invoice a company in a timely manner. I need a good organizational system in place for keeping track of what I need to do for upcoming partnerships and who I still need to follow up with once a deadline is met and a partnership is complete.

Engage More Deeply

My goal: Write down my prayers

All too often I’ll find myself praying at the end of the day and my brain feels like a jumbled mess. My mind will wander and I want to get better at being more intentional with my prayers. Since writing is something I love and something that immensely helps me work through my thoughts and feelings, I want to begin writing out my prayers to God. I am already enjoying spending some time in the morning with my devotional and think writing out prayers in the morning may be a good way to deepen my relationship with God and help me feel more focused in my prayers.