In this week’s installment of Get Rich Slowly Theater, we’re going to look at a real-life money boss: Earl Crawley, a parking attendant from Baltimore. Mr. Earl (as he’s known) was profiled on the PBS show MoneyTrack. Here’s a six-minute segment about this super saver:
Mr. Earl has worked as a parking attendant for 44 years — at the same parking lot! He’s never made more than $12 per hour. He’s never earned more than $20,000 in a year, yet he has a net worth over half a million dollars.
Like many successful folks, Earl started working when he was young. At age 13, he got a job at a produce market to help pay the family bills. His mother took most of his income to help make ends meet, leaving her son with just a few cents out of every dollar. This forced saving plan was the start of a life-long habit.
Mr. Earl says he was a slow learner. He wasn’t very good in school. He had dyslexia, so reading was a struggle. Growing up in the 1950s, there weren’t a lot of opportunities for people in situations like his. He knew he was destined for a lifetime of low-wage jobs, so he decided he’d better save what little he earned.
He and his wife raised three children — and sent them to Catholic school instead of public school — despite their meager budget. (Mr. Earl took extra jobs in order to pay tuition.) Meanwhile, he started investing.
Mr. Earl’s investing habit started small. At first, he put his money into savings stamps and savings bonds. He saved what might have seemed like meaningless amounts to other people, starting with pennies and moving up to dollars. For fifteen years, he invested $25 each month into a mutual fund. His balance grew. By the end of the 1970s, his net worth was $25,000.
Eventually, Mr. Earl decided he wanted to “play the stock market” himself. He began buying shares in Blue Chip companies like IBM and Caterpillar and Coca-Cola. He bought just a share or two at a time, but that was enough. (His first purchase was a single share of IBM in 1981.) His secret?
“Instead of taking the dividends and pocketing it, I let it set — or let it reinvest itself — and increase my shares. The more shares I had, the more dividends I had. And eventually, the more money I had down the road.”
How did Earl become so savvy with money? It’s not just because of habits he developed when he was young. You see, his parking lot is in the middle of a financial district. Over time, he picked the brains of the folks who passed his way. He picked up tips on how to save and invest.
“I talked to everybody and listened to the advice everybody gave me,” he says. Because he had trouble reading, he made a point of listening.
Today, Mr. Earl’s stock portfolio is worth more than $500,000. He owns his home free and clear. He has no debt.
Mr. Earl is a prime example of a money boss. He made the most of the cards life dealt him. He found a way to turn a losing hand into a winner. And now he’s paying it forward, teaching others how to save and invest.
So much of financial success involves good habits practiced over long periods of time.
Yes, you can still have a positive impact on your financial future if you’re starting late in life — but if you’re 59 years old and just beginning to think about financial freedom, you have a lot of work to do.
But if you’re 19, you have an extra forty years to set yourself up for financial success. This extra time makes a ginormous difference!
A lot of this is due to the magic of compounding. Over the short term, your investment returns don’t help a whole bunch. But over the long term? Over decades? Wow! Compounding can help you create a truly impressive wealth snowball.
I once received email from a reader named Anders who testified the power of compounding:
I used to save money in funds without knowing more than it gave a better interest than ordinary savings accounts. Then a few years ago I came across a book that explained compound interest and showed graphs of how it works. I was blown away by the idea!
I think, for me, that was the biggest impact on my way of thinking about savings and it got me more interested in the stock market too. So in my opinion, the things people who don’t know too much about savings/investing need to hear is about how compound interest works and how the stock market works.
We’ll leave “how the stock market works” for another day. (If you want to know more right now, check out my articles on stock market returns and how to invest.) Today I want to look at why some folks consider compounding to be the most powerful force in the universe.
The Power of Compounding
On its surface, compounding is innocuous — even boring. How much does it matter if you start saving now? Will it really affect what you can spend in the future?
To illustrate the power of compounding, I spent far too much time playing with spreadsheets. (Seriously. Kim managed to get like three major projects done in the time it took me to generate the following numbers and graphs. But I had more fun.)
Note: All of the numbers that follow are based on certain assumptions. For each of the three asset classes — stocks, bonds, gold — I’m using the long-term average real return: 6.8% for stocks, 2.4% for bonds, and 1.2% for gold. That’s what these investments return over decades (not year to year) after accounting for inflation. However, it’s very important to undertand that average is not normal. Returns can (and do) vary widely from year to year.
First up, here’s a basic look at compounding in action. This table assumes you invested one dollar into each of stocks, bonds, and gold. Based on historical averages, I’ve calculated how much your dollar would have grown to at the end of each year for fifty years:
As you can see, compounding doesn’t really do much during the first few years. After a decade, your $1.00 would nearly double if invested in stocks. (Remember, this is inflation-adjusted. The nominal number would be greater. But this is what your dollar would be worth.) If invested in bonds, that $1.00 would grow to $1.27. And if you invested in gold? That $1.00 would grow to $1.13. (For the record, my research shows that real estate offers long-term returns similar to gold. Others say real estate returns are worse than gold.)
The longer your money remains invested, however, the more powerful compounding becomes. After ten years, your $1.00 in stocks grew to nearly $2.00. Afters sixteen years, it will grow to nearly $3.00. In 20 years, it’ll grow to nearly $4.00. In 24 years, it’ll be worth more than $5.00. From there, the growth becomes even more rapid. By year 40 — which, yes, is a very long time — you’re earning more than a dollar every year.
Compounding a One-Time Investment
That’s a fine hypothetical example, but nobody invests just a dollar. Let’s assume instead that you made a one-time $5500 investment in your Roth IRA. How would your future returns on that investment vary depending on where you put the money? Here’s a table that demonstrates:
As you can see, compounding can make a huge difference — especially when time is allowed to magnify the difference in annual returns. (This is one reason index funds outshine managed mutual funds. Index funds, as a whole, earn that 6.8% average annual return that the overall stock market earns. Managed funds earn that less fees, which average about 2%. That’s not much in the short-term, but it’s a huge amount in the long-term.)
For the visual thinkers out there, I’ve created a series of charts that dramatically demonstrate the difference that compounding can make over time.
Over fifty years, compounding can make a dramatic difference if you’re able to earn higher returns on your investments! (Who has a fifty-year investment horizon? Well, your typical college student does, for one.)
The Importance of Saving
Now, it’s often said — sometimes even by me — that your investment returns are less important than your investment contributions. That is, how much you invest matters more than where you invest it. Here, for instance, is an XKCD comic belittling the power of compounding:
How true is that? Let’s look at another hypothetical example.
In this case, assume you invest $5500 on January 1st for the next fifty years. How would your investments grow in this case? Here’s the table:
And here are the charts:
Look at that! Investing more does make a difference. Shocking! Sarcasm aside, there are a couple of things to note about these numbers:
First, investing more absolutely produces better results. The more you contribute, the more there is to compound. If you want to build a wealth snowball — and I hope you do — the best thing you can do is invest as much money as possible.
Second, when you invest more, you erase some (but nowhere near all) of the difference between the rates of return. Take a look at our one-time investment example. In that situation, stocks double gold by year 13 and they double bonds by year 16. But with ongoing investments, it takes stocks 21 years to double gold and 26 years to double bonds.
Yes, the amount of you save is more important than the returns you earn. That said, there’s no denying the extraordinary power of compounding over time. Real-world numbers bear this out.
A Real-Life Example
Finally, let’s look at a real-life example or two. These are actual numbers from actual accounts.
To start, here’s the balance history for the 401(k) I started back when Get Rich Slowly was throwing off huge wads of cash:
The blue line represents my actual balance over time; the orange line represents my balance if I had not been invested. (In other words, if I were earning no return because I stuffed my money under a figurative or literal mattress.)
I’ve contributed a total of $60,518 to this 401(k) since the end of 2008. In that time, it’s grown $117.121.19 so that my balance today is $225,331.75. That’s 193.5% growth in just over eight years (or 12.31% annually).
Here’s a second example, this time with the moved money from my box factory retirement plan to a rollover IRA:
Here, I’ve contributed a total of $65,027.41 to the account — most of it in 2009, but a few thousand just last month. (I closed a smaller IRA and moved the proceeds to this account.) In that time, I’ve gained $86,425.88. That’s 132.9% growth (9.73% annually) in under eight years — all because of compounding.
The Bottom Line
Based on all of this, there are three keys to make compounding work for you:
Start early. The sooner you start, the more time compounding has to work in your favor, and the wealthier you can become. The next best thing to starting early is starting now. Yes, if you start investing at age 19, you’ll enjoy better results by the time you’re 65. But even if you’re 59, compounding is your friend and you shouldn’t hesitate to invest.
Stay disciplined. Make regular contributions to your savings and retirement accounts, and do what you can to increase your deposits as time goes on. Your goal should be to generate as large a saving rate as possible, to widen the gap between what you earn and what you spend. Don’t be tempted to cash out a retirement account when you switch jobs. I see so many people make this mistake, and it makes me want to cry. Don’t be tempted to sacrifice your future security for a few bucks today.
Be patient. Don’t touch your investments. Compounding only works if you let your money grow. Remember: You’re creating a wealth snowball. At first, your returns may seem small, but they’ll become enormous as more money accumulates.
Do these things, and your wealth snowball will grow. Sure, there might be some years where your investment balance decreases rather than increases. Again, that’s normal. The examples I’ve used here assume stocks, bonds, and gold return a stead annual average. They don’t. Their returns fluctuate — sometimes wildly. But, over long periods of time, your investment accounts should steadily swell.
For a brilliant example of compounding in real life, turn to American statesman Benjamin Franklin. When he died in 1790, Franklin left the equivalent of $4400 to each of two cities, Boston and Philadelphia. But his gift came with strings attached. The money had to be loaned out to young married couples at five percent interest. What’s more, the cities couldn’t access the funds until 1890 — and they couldn’t have full access until 1990. Two hundred years later, Franklin’s $8800 bequest had grown to more than $6.5 million between the two cities! True story.
Kim Kardashian is probably best known for certain assets many women wish they had and many men desire. But her claim to fame doesn’t end there.
More people probably know the name Kardashian than know why we call a signature a John Hancock. Many blame Kim’s sex tape, leaked in 2007, for the Kardashian fame. And while, yes, this put Kim and Ray J on the front page of every newspaper in the country, viral doesn’t always equate instant fame (just look at Rebecca Black).
It’s what you do with your sudden notoriety that counts. Kim pounced. She took a sex tape lawsuit and turned it into gold.
How did she do it? Let’s take a look.
1. No Publicity Is Bad Publicity
It’s how the most successful celebrities rise to the top. In fact, one such celebrity fuzzball is in the White House at this very moment because he adopted this motto. No publicity is bad publicity. And it works.
“Like water off a duck’s back” is the way my grandpa would have put it. A sex tape scandal would have sunk so many other people, but to the Kardashians, it was an opportunity.
Why is Kardashian a household name? Because there are just as many haters as there are lovers of the Kardashians. Just like Trump’s fanbase, the haters in the Kardashian world only serve to cement the lovers.
Every time controversy blows up in the Kardashian world (think divorcing a basketball player you married three months ago), Kim’s audience gets a treat. They get to watch all the haters both in media and outside media go wild. And they get to watch Kim and her family take it with the grace of Olympian ice skaters.
Many companies shy away from controversy and there are some subjects you just don’t touch. But stirring the pot isn’t necessarily a bad idea. And sometimes, you can get away with it, apologize, and come away with even more fans.
Just look at Kendall Jenner and her Pepsi stunt. I personally doubt she cared a whit about whitewashed protestors. She’s in it for the fame and the money.
2. Kim Plays to Her Audience
Who is Kim’s audience? It’s the people who wish they could be her or at least wish they could live “the life” (whatever that is).
Before the sex tape scandal, Kim and her sisters started a business geared toward rich people with too many clothes. They would raid a person’s closet and sell off their stuff on eBay. All for a pretty penny.
The Kardashians were already living a rich Californian lifestyle beforehand. And they knew that once fame kicked in, many would envy their way of life.
Kim delivers to her audience what they crave. Selfies in bathing suits. Vacations in exotic locations. Drama.
It’s pretty easy for Kim to define her audience. And she probably (no, definitely) has a marketing manager running her numbers. But that doesn’t mean you can’t emulate her (marketing manager’s) practices.
Give your audience what they want. If you’re an outdoor adventure company, your audience wants stories that inspire adventures. If you’re a web design company, your audience wants to know how to build an awesome website.
Your audience may not be on only one social media app. They certainly consume more than one form of media. If you’re looking to influence the most people, you have to diversify your efforts.
This is exactly what Kim continues to do. If she had settled for the TV show and spin-off, she would still be rolling in fame. But Kim would not be satisfied.
Her name is on everything from diets to exercise videos to clothing lines and makeup. Heck, she even has her own mobile video game (you bet she’s indoctrinating young minds with that one!).
The lesson here is that with every market you enter, you gain that much more influence. But be careful. Don’t spread beyond what you can handle.
While diversifying will increase your audience, said audience expects a certain level of engagement. Growing beyond your ability to engage will make any effort to gain influence through diversification moot.
4. Feel Fully Invested Before Jumping In
Kim is sometimes late to the party. And she touts that as a good thing. When presented with a new marketing concept, Kim wants to fully investigate it before investing.
This is wisdom in the most unlikely of places. While an entrepreneur should take risks (they would never step out the door otherwise), they should also do their research.
What is the likelihood of failure? Is the reward worth it? Will it impact my brand?
A great example of Kim’s hesitancy paying off: Kimoji. The app was an idea long in the works. Think years.
Waiting for the app launch was the smart move. Mobile technology had evolved to the point where a custom emoji app could break the Apple Store.
The best entrepreneurs analyze trends and take calculated risks. They develop a promotion strategy based on real data and not entirely on gut instinct.
5. The Kardashian Brand Consistency
Every time Kim steps outside her door or puts a photo of herself (or parts of herself) out there, she’s instantly recognizable as “Kim.” Even her emoji app screams Kim Kardashian (just look at any screenshot of the thing–peaches anyone?).
It’s brand consistency that keeps people coming back for more. If one day you’re doing Let’s Play Videos and the next you’re doing a makeup tutorial, you’ll lose your audience.
Unless randomness is your M.O., then you’d better be freakin’ random all the time.
Don’t Take It Laying Down
Whatever you think of Kim Kardashian, she didn’t take her fame laying down. She made something of strange circumstances and launched a successful personal brand most envy.
Learn what you can from successful celebrities. If you can plug in their strategy, you might find yourself in a mansion on the coast some day.
Want more celebrity entrepreneur advice? Click here.
In order to survive and thrive, you need to earn a profit.
You already know profit is the lifeblood of every business. It’s like food and water for the human body. Although proper nutrition isn’t the purpose of life, we couldn’t exist without it. Food and water give us strength to do the stuff that matters most. So too, profit isn’t necessarily the purpose of business — but a company can’t survive without it.
Here’s a secret: People need profit too.
In personal finance, “profit” is typically called “savings”. That’s too bad. When people hear about savings, their eyes glaze over and their brains turn to mush. Bor-ing! But if you talk about profit instead, people get jazzed: “Of course, I want to earn a profit! Who wouldn’t?”
Profit is easy to calculate. It’s net income, the difference between what you earn and what you spend. You can compute your profit with this simple formula:
PROFIT = INCOME – EXPENSES
If you earned $4000 last month and spent $3000, you had a profit of $1000. If you earned $4000 and spent $4500, you had a loss of $500.
There are only two ways a business can boost profits, and there are only two ways you can boost personal profitability:
Spend less. A business can increase profits by slashing overhead: finding new suppliers, renting cheaper office space, laying off employees. You can increase your personal profit by spending less on groceries, cutting cable television, or refinancing your mortgage.
Earn more. To generate increased revenue, a business might develop new products or find new ways to market its services. At home, you could make more by working overtime, taking a second job, or selling your motorcycle.
When you earn a profit, you don’t have to worry about how you’ll pay your bills. Profit lets you chip away at the chains of debt. Profit removes the wall of worry and grants you control of your life. Profit frees you to do work that you want instead of being trapped by a job you hate. When you make a profit, you truly become the boss of your own life.
With even a small surplus, the balance of power shifts in your favor.
The Most Important Number in Personal Finance
If you’ve ever calculated your net worth, you know that number is a snapshot of your current wealth. But it’s more than that. Your net worth is the grand total of years (or decades) of profits and losses.
As the authors of Your Money or Your Life put it, “[Your net worth] is what you currently have to show for your lifetime income; the rest is memories and illusions.” Ouch!
The greater the gap between your earning and spending, the faster your net worth grows (or shrinks). This may seem obvious, but it’s important. Everything you do — clipping coupons, asking for a raise, saving for a retirement — should be done to increase your profit and wealth.
But profit doesn’t mean much on its own. Is a $1000 monthly profit good or bad? Well, it depends on your circumstances.
If your income is $2000 per month (or $24,000 per year), a $1000 monthly profit is great. That’s a saving rate of 50%. Congratulations!
On the other hand, if your income is $20,000 per month (or $240,000 per year), a $1000 monthly profit gives you a saving rate of 5%. That’s average at best.
You see, it’s not your total income that determines how wealthy you are and will become. Nor is it your monthly surplus. No, the true measure of progress is your saving rate — how much you save as a percentage of your income.
In business, saving rate is called profit margin. I think it’s useful for everyday people — especially folks who have decided to act like the CFO of their own lives — to think of saving rate as profit margin too.
Pull out your personal mission statement. Look at your goals. Your profit margin directly affects how quickly you’ll achieve these aims. A saving rate of 20% will allow you to reach your destination twice as quickly as a saving rate of 10%. And if you can save 40% or 60%, you’ll get there even quicker.
The growth of your wealth snowball is directly dependent on the size of your saving rate.
Pete’s personal mission is to enjoy a rich life with his small family in a small house in a small town in Colorado. He wants to pass his days slicing through canyons on his bicycle, building things in his workshop, and sharing quiet moments with his wife and son. And Pete doesn’t want to be tied to a job.
Following the standard advice to save between 10% and 20% of his income, it would have taken decades for Pete to achieve these goals. Pete is an impatient man. He didn’t want to wait that long, so he deliberately pumped up his saving rate.
After college, Pete and his wife worked long hours at jobs that paid well. They moved to a town where the cost of living was low and they could bike anywhere they needed. They bought a modest home. The Mustache family generated a lot of revenue while keeping overhead low.
As a result, Pete and his wife set aside more than half of their combined take-home pay. After ten years with profit margins near 70%, they were able to “retire”. He was thirty years old. Now, a decade later, Pete and his wife continue to pursue their mission, happily ignoring detractors who say what they’ve done is impossible.
This is the bottom line, the entire thesis of the Money Boss method: Profit is power.
Computing Your Profit Margin
My mission at Get Rich Slowly is to give you the power to choose the lifestyle you want. That means helping you boost your saving rate. If you promise to do the work needed to generate greater “profits”, I promise to share the strategies and mindsets that will help you do so.
To find your current saving rate, you need two other numbers: your monthly income and your monthly expenses. For now, let’s look at only last month. (You’re free to run the numbers on past months or years, but for this exercise last month is enough.)
Here’s how to find your income and expenses:
If you’re a money geek who already generates a monthly income statement (a.k.a. profit-and-loss statement), just grab your total income and total expenses from the form.
Many of you track your money in Quicken or through services like Personal Capital. These too make it easy to find your monthly income and expenses. Some will even compute your profit for you. Here, for instance, are my own numbers from Personal Capital. You can see I had a $3214 profit in this example month, which means my saving rate was about 32%. (By the way, these numbers aren’t normal for me. Both income and spending were high!)
If your finances aren’t yet automated, it’s not too tough to run numbers by hand. Collect your brokerage, bank, and credit-card statements from last month. Use these to total your income and expenses. (You shouldn’t have to do this line by line. Most statements total income and expenses separately in some fashion.)
What if you don’t track your money? Start! If you owned a business, you’d keep books. Well, a money boss keeps books too. It’s the only way to spot trends and to measure progress. Pick a tracking method — many GRS readers like YNAB — and make tracking part of your weekly financial routine.
Now it’s time for a little math. To find your monthly profit, subtract your income from your expenses. (If your income was $3500 and your expenses were $3000, your profit was $500.) To find your profit margin (or saving rate), divide your profit by your income. (Using the previous example, you’d divide $500 by $3500 to get 0.14286 — a profit margin of 14.3%.)
Burn this number onto your brain. We’re going to spend the months and years ahead making your profit margin grow.
If you want to get fancy, run the numbers again. This time subtract your mortgage and car loan and credit-card payments (and so on) from your expenses before calculating profit and profit margin. See how much profit you’ll have once you’ve paid off your debt? Cool, huh?
Note: During the month of March, I’m migrating old Money Boss material to Get Rich Slowly — including the articles that describe the “Money Boss method”. This is the third of those articles.
Look for further installments in the “Money Boss method” series twice a week until they’ve all been transferred from the old site.
This announcement will seem strange to folks who have been following along since last October. I apologize. However, I just now reclaimed the old subscription management account from the site’s previous owners. That means — in theory — that when I publish this short blurb, up to 120,000 former RSS subscribers will suddenly discover that I’m back and that the site is back.
Plus, if things work correctly, another 28,406 people will get an email tomorrow morning letting them know that GRS has returned from the dead. This announcement is for these former fans — not for the people who have been reading right along.
(There’s a distinct possibility that nobody will see the announcement because I’ve reconnected things incorrectly. If that happens, I’ll have to make fixes then re-announce.)
If you are a former reader who is shocked to see this news in your inbox, welcome back! Look around. I hope you’ll be pleasantly surprised to see that GRS has awoken from hibernation, and that we’re publishing awesome articles. There’s a lot of maintenance to be done behind the scenes to get the site modernized, but we’re working on it.
As part of this process, the old email system is going away. (It’s been dead for several years, anyhow.) If you’d like to read Get Rich Slowly by email, subscribe to the GRS newsletter here. Every Friday, I send an update profiling three of the week’s best blog articles plus three additional outstanding money-related stories from other sites. I hope the 6692 people who currently subscribe to the newsletter would agree that it’s both useful and fun.
In any event, welcome to all readers — new and old. I’m grateful to have you here.
I’m generally an even-keeled guy. I don’t get worked up about much. I understand that different people have different perspectives, so I try to be respectful when others disagree with me. Having said that, there are indeed certain things that piss me off.
So how much are you supposed to be saving in order to finance 20 to 30 years post-work? The commonly accepted rule of thumb is that you’ll want about 70% of your former annual income — at least — to continue living at or near the style to which you’ve been accustomed.
Let me be blunt: This rule of thumb is asinine.
This “rule” (which is used by most retirement calculators, both on the web and from financial planners) estimates how much money you’ll need by using your income as a starting point. The 70% ratio is commonly used, but plenty of places use 80% or 90%. Regardless the percentage, estimating your retirement spending from your current income is ludicrous. It’s like trying to guess how much fuel you’ll use on a trip to grandmother’s house based on the size of your vehicle’s gas tank!
Say you make $50,000 a year but spend $60,000. In this case, your income understates your lifestyle by $10,000 a year. If you based your retirement needs on your income, you’d be screwed.
On the other hand, if you’re a money boss who saves half what she earns, you’d only spend $25,000 of a $50,000 salary. Basing your retirement needs on your income would cause you to save much more than you need. You’d be working long after the point at which you could retire safely.
Predicting how much much to save for retirement based on income makes zero sense. (Zero!) It’s one of those pervasive financial rules of thumb — such as “buy as much home as you can afford” — that does more harm than good. There’s a real danger that if you heed this advice you won’t have enough saved in retirement. If you’re proactive like many Get Rich Slowly readers are, you run the risk of saving too much, meaning you’ll miss out on using money to enjoy life when you’re younger.
Instead of estimating how much to save for retirement based on your income, it makes far more sense to plan your retirement needs around your spending. Your spending reflects your lifestyle; your income doesn’t.
So, how much do you need to save for retirement? How much will you spend? It depends.
For many people, expenses drop when they stop working. They drive less. The kids are out of the house. The mortgage is gone. And, ironically, they no longer have to save for retirement. Meanwhile, other expenses increase. (Most notably, health care costs tend to balloon as we age.)
That said, it is possible to get a general idea of how much you’ll need in the future. According to the 2016 Retirement Confidence Survey: about 38% spend more in retirement than when they’re working. 21% spend less, and 38% spend the same. Past iterations of this survey have shown that roughly two-thirds of Americans spend the same (or only slightly different amounts) during retirement as they did while working.
Translation: In general, your pre-retirement expenses are an excellent predictor of your post-retirement expenses. That’s why I prefer this rule of thumb: When estimating how much you need to save for retirement, assume you’ll spend about as much in the future as you do now.
Forget the “70% of your income” bullshit when planning for retirement. Use 100% of your current expenses instead.
Footnote When I originally published this article at Money Boss in July 2016, financial planner Michael Kitces — who has an awesome blog — sent me a note to explain why advisors use the “70% of your income” rule. The answer? “Because it works.”
Generally speaking, the 70% of income replacement ratio works because once you subtract taxes and work-related expenses (plus savings), it’s close to 100% of expenses in most cases. I still think this is a crazy way to come at it — why not just use 100% of expenses? — and that it’s completely off-base for folks with high saving rates. For more on this subject, check out Michael’s article in defense of the 70% replacement ratio.
Okay, I know this is sort of strange thing for me to post at Get Rich Slowly — although it’s not really that strange if you’ve been reading me for any length of time — but this afternoon, I want to share a mind-boggling deal on digital comics at Amazon.
I’ve been reading comic books all of my life. Over the course of 40 years, I built a masssive (and valuable) collection. Then, about five years ago, I sold most of my comics. I only kept the non-valuable stuff that had nostalgic value. (My complete run of Micronauts, for example. I love Micronauts.)
That said, I’ve continued to read comics on my Kindle. They’re cheaper than physical comic books and they carry less mental baggage.
Generally speaking, a collection of digital comics runs about $8 to $12 for a book that contains maybe ten individual comic books. That’s not a bad deal, but it’s not such a good deal that I can spend indiscriminately.
Right now, however, Amazon is having some crazy sale that I cannot fathom. A few hundred Marvel comic compilations — there doesn’t seem to be a rhyme or reason as to the selection — are on sale for ninety-nine cents each.
I’m sorry, but this is like a once in a lifetime deal. I feel like I would be a bad blogger if I did not share this news so that my fellow nerds could take advantage. I have zero clue how long the deal will last. I only know that it’s been around since Monday. In the past 48 hours, I’ve spent $72 on comic compilations, but that $72 has netted me 73 books (or about 730 individual comics).
Here are some examples of the stuff that’s on sale:
In 1988’s Cashing In on the American Dream [my review], Paul Terhorst wrote about retiring at age 35. Although his aim was to show readers the path to early retirement, he also sang the praises of temporary retirement — retiring young with the idea that you might go back to work later in life.
In many ways, Work Less, Live More (published in 2005) reads like an updated (and more detailed) Cashing In on the American Dream. Even the author bios sound similar. Here’s how Clyatt describes his background:
In 2001, after 20 years of sustained high-pressure work, the last seven spent battling in the Internet wars, my wife Wonda and I chucked it in, mothballed our suits, rented a small summer house in Italy, and began our new lives as early retirees.
But early retirement was no paradise for Clyatt and his wife. They were stressed, and their friends were stressed too. Did he really have enough money saved? What about the sluggish stock market? He began to question his assumptions: Had he made a terrible mistake?
Ultimately, he realized the worst-case scenario wasn’t so bad. He probably did have enough to stashed away to sustain his early retirement, but even if he didn’t the downside was that he might have to do a little work. This realization allowed him to embrace the idea of semi-retirement.
“Doing some amount of engaging work offers a comfortable transition between full work mode and full retirement mode,” Clyatt writes. “With a modest income from part-time work, early semi-retirees may not have to face the dramatic downshifting in spending and lifestyle that so often confronts those who live only on savings or pensions.”
Here’s an extended explanation from the book:
Semi-retirement — reclaiming a proper balance between life and work by leaving a full-time job — offers a way out of the madness of overwork. By reducing spending and switching to a pared-back but more satisfying lifestyle, less money goes out the door.
Tapping into accumulated savings in a sensible way provides a steady annual income. Any shortfall can be filled with a modest amount of work, done in an entirely new state of mind: With less need to work for the largest paycheck possible, you can find low-stress work that you truly enjoy, on a schedule that gives you time to breathe.
Clyatt divides Work Less, Live More into eight chapters, each of which explores one of his rules for semi-retirement:
Figure out why you want to do this.
Live below your means.
Put your investing on autopilot.
Take 4% forever.
Stop worrying about taxes.
Do anything you want, but do something.
Don’t blow it.
Make your life matter.
Let’s take a closer look at the semi-retirement approach to creating work-life balance.
Figure Out Why You Want to Do This
Pursuing semi-retirement (and early retirement) requires commitment. It takes time and energy. Before you begin, Clyatt says, you should ask yourself why you want to do this. (Do you want to do this? If you love your career and want to keep working, then do so. Don’t give up a good thing!)
If semi-retirement feels like a good fit for you, you should do two things:
Examine your current life to determine which aspects don’t work well. Are you spending too much time in the car? Do you hate your neighborhood? Do you wish you had more time for fitness?
Conversely, try to imagine what your ideal life would be like. If you had all the time and money in the world, what would you do?
Using the “big rocks” metaphor, Clyatt says the key to a successful semi-retirement is prioritizing the important stuff while allowing the daily distractions to sift to the bottom of your to-do list. Here’s a video that demonstrates this idea:
This concept is true for everybody, whether you want to pursue early retirement or not. To better manage your time, to increase your well-being, you ought to focus on your big rocks first.
If you decide that semi-retirement is right for you, be sure your partner is on board. You don’t want to be working at cross purposes. Also, be careful to practice moderation. Too many people become obsessed with saving too much too quickly. This can lead to disillusionment and resentment. Instead, practice balance. Remember to enjoy today even as you save for tomorrow.
Live Below Your Means
“If you are planning to semi-retire, you’ll need to spend less than you earn,” Clyatt writes. You’ll need to live below your means.
Anyone who is under 65 and on the path of semi-retirement needs to think of assets as a resource to be carefully planted and harvested. You may long for some material luxury such as a new car or a second home, and you may even have enough cash on hand to pay for it. But because you are building a safe spending and budgeting plan for the long term, you need to keep that money invested and working for you, instead.
According to Clyatt, “Living Below Your Means is spending less than you make, less than you could, less than your peers. It’s a powerful tool.” In Get Rich Slowly terms, he’s talking about the power of personal profit — the gap between your earning and spending. The greater your profit margin, the faster you can achieve your goals.
The advice in Work Less, Live More is standard stuff, but that’s not a bad thing. You hear these recommendations all the time because they work: manage your career to maximize income, cut costs wherever possible (especially on the big stuff). “Don’t even try to keep up with the Joneses,” writes Clyatt. And learn to say “no” — to your friends, to your family, and especially to yourself.
Put Your Investing on Autopilot
What do you do with your personal profit? Build an enormous retirement stash! Clyatt advocates what he calls Rational Investing. Here are its basic tenets:
Allocate your investments broadly. Don’t put all of your eggs into one basket. Practice smart diversification, investing in a wide variety of asset classes. In other words, don’t limit yourself to only stocks or only real estate. Own both. Plus bonds. Plus cash. And so on. Own a bit of everything.
Rebalance your portfolio. Have a target asset allocation — the way your money is divided among your investments — and strive to maintain that. If stocks have a good year and now your portfolio is weighted to heavily in that direction, then sell some stocks and buy whatever is now under-represented.
Keep management fees low. By now, most educated investors understand that fees can wreak havoc on long-term investment performance. The number-one barrier to good returns is investor behavior. But fees and expenses are the second-biggest problem.
“A semi-retiree, particularly a younger one, should not try to simply achieve the highest rate of return if that means an unacceptable level of volatility or risk,” Clyatt writes. “Choose a mix of assets to maintain an acceptable level of return at the lowest risk, which generally means holding lower levels of equity [stock] than some other long-term investing models advocate.”
Although Clyatt likes passive investing, he does not recommend putting your entire stash into a single S&P 500 index fund. He prefers a slightly more complicated (and nuanced) approach.
Take 4% Forever
“Withdrawing money safely from your portfolio each year is the engine that makes semi-retirement viable,” Clyatt writes. There are two steps to starting your economic engine:
Choose a safe rate at which to withdraw.
Withdraw money using a safe method.
There’s a wide range of rigorous statistical research to support the idea that it’s safe to withdraw about 4% from your portfolio each year to use as living expenses. But this number is an estimate. It’s not a rule and it’s not a guarantee. If you knew how long you were going to live and what your investment returns would be each year, it’d be easy to come up with an exact number. But you can’t know these things, so all you can do is estimate.
Studies show that withdrawing about 4% each year will allow you to keep the inflation-adjusted value of your principal intact. Of course, if your goal is to “die broke” — which some people aim to do — your spend rate can be higher. And if you’re an older semi-retiree, you can withdraw more than 4% too.
Clyatt says that in the olden days, people set their withdrawal rate on their first day of retirement — then only adjusted it for inflation in the future. So, if you had $1,000,000 saved when you retired, you’d take $40,000 for living expenses in the first year, and adjust that number annually for inflation thereafter.
Unfortunately, this method runs a high risk of depleting a portfolio if the economy turns sour. Instead, Clyatt recommends the following:
Each year, withdraw up to 4% of your portfolio’s value for living expenses. “You can increase the amount to 4.5% with slightly diminished safety,” he writes.
After a bad year for the stock market, use what he calls the 95% rule: Reduce your spending to 95% of the previous year. So, if you withdrew $40,000 for living expenses last year but the stock market has crashed, then take $38,000 this year (95% of $40,000).
How do you get your 4% living expenses out of your investment portfolio? Simple. Instead of having distributions reinvested — as most of us do — request that these funds be channeled into a money market account. Pull out more cash when you rebalance your portfolio every year. And if you need more money, then sell some of your investments.
Filling in the Blanks
The first four chapters form the bulk of the book. The last four chapters fill in some blanks, covering topics ranging from taxes to time management. Here are some highlights:
As a semi-retiree, your taxes will be comparatively low. Couple this with two other facts — U.S. taxes are low compared to other nations and they’re low compared to our own history — and you should let your mind rest easy. Don’t fret so much. All the same, Clyatt offers a handful of strategies for minimizing your tax burden during retirement.
In Cashing In on the American Dream, Paul Terhorst offered the following rule to early retirees: “Do what you wish, but you must do something. The idea is to live, not to dissipate time.” Clyatt echoes this advice. He suggests you imagine yourself as a nineteen-year-old kid going to college. You have no real idea what you want to be or do, so you engage in exploration and discovery to figure out what you like. Fill your time with meaningful hobbies, work, and experiences. (As always, I suggest people start by crafting a personal mission statement.)
As awesome as early retirement and semi-retirement are, they’re not without drawbacks. Don’t allow these challenges to sabotage you. Handle the guilt, the boredom, and the panic constructively. Let go of your ego and allow yourself to be ordinary. Honor your own time, and honor the time of your spouse or partner.
Finally, make your life matter. “It’s up to you to decide what you will make of your life,” Clyatt writes. “People with more time to stop and talk — or even better, stop and listen — could help make life a little better for everyone.”
Work Less, Live More contains ample examples from real-life people who have opted for semi-retirement. These folks come from all backgrounds and have a variety of motives for choosing this path. And semi-retirement looks different for each individual. For some it’s a chance to travel. For others, it’s a chance to pursue a passion (such as art). And for others it’s a chance to spend more time with their children.
For years, Work Less, Live More has been my go-to book for info about early retirement. I give away copies several times a year. I recommend it when replying to email. I refer to it myself when I have questions.
I like this book because it strikes a balance between the high-level Big Picture stuff (like you’d find in Cashing In on the American Dream) and the low-level nitty-gritty numbers crunching (such as the material in Early Retirement Extreme). Both of those books are great, and I recommend them too, but Work Less, Live More seems to offer the best all-around approach to early retirement planning.
Postscript: I contacted Clyatt by email, and he graciously agreed to share an update on his own semi-retirement. Look for that article in this Sunday’s “reader story” slot!
Did you know that HBO made a show loosely based on Mark Whalberg’s possy of friends? It’s called Entourage and the cast (the Chase Men) are a lot prettier than their real-life counterparts. Perhaps this was a Walbergian fantasy.
In fact, HBO considered making the show into a direct documentary. But Walberg’s violent past was too much for the early aughts audience. They instead chose a satirical approach which was probably a good idea.
Walberg is executive producer and he had a say in almost everything that went into Entourage. Walberg is an entrepreneur as well as a successful Hollywood actor. And the satirical comedy Entourage gives a glimpse into some of what you should (or maybe shouldn’t) do to get to the top.
1. Have a Loyal Crew Like Vincent
Many of us start out as solopreneurs. It can be a lonely business. Sure, we have friends we see on occasion, but they aren’t going in the same direction as we are.
Just like the President of the United States, Vincent was nothing without his friends and those with whom he surrounded himself.
Ari gold, Turtle, Johnny Drama, and Eric Murphy each contributed something to Vincent’s life. Eric or “E.” is an honest Abe who helps Vincent make decisions. He’s not afraid to speak his mind especially when Vincent refers to the area around his crotch as his “airspace”.
We all need an E. in our lives to balance out our impulses.
Ari Gold is his business manager. He doesn’t get along with “E.” at first. Ari supplies Vincent with opportunities.
This is the holy trinity of Entourage. If we cut the rest of Vincent’s crew, the show would go on just fine.
Have a holy trinity. People you trust with your life. One to push you to your limits and another to temper your passion.
2. Don’t Let Success Get to Your Head
The decision to forget about Walberg’s past is an unfortunate decision. Walberg (Vincent) did not grow up rich. He was the youngest of 9 kids.
He grew up in Boston and his parents divorced when he was 11. At 14, he dropped out of school and became a criminal. He stole, sold drugs, and did side hustles (the illegal kind). He eventually hit the bottom of the barrel when he beat a Vietnamese man bloody and went to jail.
After jail, he vowed to turn his life around and put his energy toward more constructive pursuits. His luck really turned when his brother Donnie from the then popular band New Kids on the Block.
When Reality Still Sneaks In
Instead of his journey from rough and criminal to stardom, the producers decided a sugar-coated version of Walberg was needed. Where do we begin Entourage? In a mansion.
Walberg is already rich. And that seems to the whole point. We’re supposed to glory and dream of the high life where we can get away with almost anything in Hollywood because “money”.
It’s why some successful people fail. They take their success for granted and let important things slide.
Vincent was the only one (ironically) not chasing the dollar in the show. But even Ari would get caught up in the dollar amount sometimes. And it was E. who would bring Vincent back in those moments.
Vincent got it right when he said, “I came from nothing. And as much as I love all the toys, I really don’t need them.”
This should be your mindset. Chase only things that add value to your life and are in line with your personal goals and standards. The money will never be enough.
3. Fail Often
Kilian Jornet climbed mount Everest twice…in two weeks. He holds the record for the fastest climb. His motto? Fail often.
You see this time and again in Entourage. Vince takes a gig like Medellin, it fails, nobody wants to work with him, and he keeps trying.
The biggest ballers in history are the people who failed the most. J.K Rowling got rejected over and over, persisted (while living on food stamps), and is now one of the richest women in the world. Henry Ford failed at five businesses before succeeding with automobiles.
Rowling even says, “It’s impossible to live without failing at something. Unless you live so cautiously that you might as well not have lived at all. In which case, you fail by default.”
Taking calculated risks is a major part of any business. You take out a loan hoping to make enough to pay it back and then some. You hire people hoping they are productive and make you more money than you pay them.
Nothing you do in this life is without risk. And when you do fail (and you will), you must have the will to get back up and keep trying even if it means doing something completely different.
9. Diversify: Don’t Keep All Them Eggs in One Basket
Yeah, brand consistency is great. And each “egg” should be uniform and pretty and well painted. But everyone who gambles knows you shouldn’t put all your chips on one square.
If things go sideways on one gig, you should have other gigs going to hold you up. This is what makes Vince’s life interesting for a while. He tries things like singing at birthday parties or tried his luck in fashion.
If one industry gives up the ghost, then you’ll know that the others will prop you up until you find a replacement.
Perhaps you go into app development and you also do web development on the side. Your apps fail, then you’ll end up with a great job in web development.
Keep Your Friends Close
Whatever you do as a soloprenuer, always value those closest to you. Vince would be nothing without his friends and family. Literally.
Look around you. Who in your life gives you the most value. Stick by them and they’ll stick by you.
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