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“What’s your number?”
“My what?”
It was 1999. I was leaning into wind and rain on a downtown Boston street on my way to a client meeting. My colleague and I each wore suits, ties and insulated raincoats, dressed like 1950 G-men. After a career including ditch digger, carpenter, bartender, bike courier, teacher and journalist, I’d landed a job as a banker.
“You know, your number, when you hang it up.”
Hang it up? At the time, I had a wife and a four-year-old. The most long-term planning I’d done was putting aside some money that might one day fund a house down payment.
Twenty years later, I started to think of a number, but it was a different one— how long until I am dead? I came up with 450 months, the mid-point of a wide range, what statisticians call “path dependency.” I could live beyond 100 or I could, like someone most of us know, die suddenly from an aggressive disease or a plane or car crash.
Once I began to think about my expiration date, two questions came into focus––what would I regret not having done and what would it cost to do that thing? What constitutes regret is likely very specific to each person, the cost is not. More on regrets below; first, the money piece.
The money questions occurred at the same time as interest rates fell close to zero, which makes the cost question more tricky. Interest rates are a topic that probably bore you and definitely impact you. (Read “Fathers, Sons and Money,” for further explanation of interest rates).
The money piece was a matter of assessing spending relative to savings. To solve the equation, I could work on the denominator (spending) or the numerator (savings) or both.
The denominator is consumption. The average global household spends around $16,000 a year. The average US household spends about $65,000 a year, according to the Bureau of Labor (my wife and I spend more). Between your bank account and your credit card, your number isn’t hard to find.
Focusing on reducing the denominator has its merits. My Russian-born grandfather stopped working regular jobs in his 40s and later moved to rural Mexico. I don’t know how much money he spent, but not much. When I think about the denominator, I am not planning on moving to Mexico. I try to avoid things that would be a game changer—like divorce—and try not to fret about smaller things, like electricity bills.
The numerator is saving. Armed with a spending number, I calculated required savings to take a new risk that might minimize deathbed regret.
I looked at four different methodologies to come up with required savings.
1. Dollars of spending times years alive. If I was the typical US household, I’d need $2.4 million dollars to retire (37.5 years times $65k). For reference, the typical US family has closer to $100,000. That will cause pain.
2. The interest rate on a US Inflation-Indexed Treasury bond. A bond is a loan. Inflation linked bonds are a specific type of government bond. They pay you back in real, inflation adjusted dollars. At present these yields are negative.
3. Assume my savings will grow at a certain amount, say slightly faster than the rate of inflation or 4% by doing things like investing in the stock market. By this methodology the typical American family would need $1,625,000 in savings.
4. Buy an annuity, a contract where an insurance company provides a guaranteed annual payment. On their website, various companies guarantee a 5% rate of return. The typical family would need to give them $1,300,000.
The problem is, methodologies #2, #3 and #4 are not reliable, or at least reliable enough for me. The stock market can go through long periods of weakness and betting on an insurance company means I now have a huge risk if the company runs into problems. I didn’t want to pay the government (in real terms) to borrow my money. It’s also worth noting that the reason the stock market is so high is precisely because interest rates are so low. Low rates are a warning on bonds and stocks. (By the way, this is NOT financial advice, I am sharing thoughts).
So I did the calculations with method #1 and concluded I could afford to address potential regrets. Could doesn’t mean should. For me, voluntarily leaving an existing job was a wrenching decision. Work is more than a salary and health insurance, it is relationships, routine, identity. At the same time, I’d spent a quarter century working for others—many of them extraordinary people—and roughly a quarter century before that either beholden to or under the guidance of teachers.
I knew what I’d take a risk on: writing. Perhaps there is something you are eager to take a risk on, be it creating a company, making a trip or some other endeavor. I suspect we revere successful risk takers––think Obama or Jobs––or at least I do, because they make something out of nothing. That’s what writing a story is, a blank white computer screen over time filled with words a reader finds meaningful. Virginia Woolf famously quipped that a woman must have “money and a room of one’s own” to write. To my knowledge, she never defined how to stress-test the money piece.
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