Month: August 2019

If you divided the bloggers in the personal finance and early retirement space into groups you could split them into the “Not early retired yet but on my way!” group and the “Already early retired and this is how I did it!” group. I’m in the second group and have been for going on four years now and that gives me a perspective on what early retirement is like that isn’t based on my imagination. It is based in cold hard reality.

I always enjoy blogs written by those who are on the journey but haven’t actually pulled the trigger on leaving the full time work world behind. It is kind of like listening to kids talk about what they want to do when they grow up. That’s not to say I’m the wise one, only to say dreaming about something and living it are two different things. Some dreamers talk about traveling full time, being nomadic and rootless whether that is in an RV or backpacking around the world living in hostels. And in fact there are some notable bloggers doing just that. My wife and I travel overseas and all over this country and we do enjoy it but after about five or six days we are usually missing home, I do not think we could ever adopt a permanent traveler lifestyle. Others see becoming organic farmers as an idyllic pursuit. I’m married to a farm girl and I’ve spent just enough time on farms to know that’s back breaking, monotonous and relentless work that isn’t on my list of fun times.

And many others list out what they’ll do on a typical early retired “day in the life of” with quite a detailed schedule. This often includes a pretty sizable chunk of time volunteering at Habitat for Humanity, a rescue animal facility or the local food pantry. That’s where I want to take you today. To the world of volunteering. Most FIRE devotees are living very busy lives, many have young children, pets and side gigs that just do not allow enough time for volunteer work. But many of these same people look forward to a more leisurely existence once they reach financial independence. A life with many unscheduled hours in it, maybe most of the hours they are currently spending at a 9 to 5 job. A frequent thought expressed is that they will spend some of these hours volunteering for a cause they believe in deeply. They feel this will provide them more meaning and fulfillment than their old day job and will be a key puzzle piece in their pursuit of happiness.

As a slightly early retired guy what has my experience shown me regarding the vast satisfaction that comes from volunteering? The short answer is that volunteering is not that satisfying and if you are expecting it to provide a major part of your reason for getting up in the morning, I think you’ll be disappointed. Ouch! That may have triggered a few millennial readers, and I’m sorry for that but it is for your own good. Let me see if I can explain why I am not so enthused about the volunteer life.

First I’m a habitual and lifelong volunteer. I always tell a similarly inclined friend of mine that she’s a pathological volunteer because she can’t tell anyone no, but the same thing is true for me. I always say yes. I’m a little more selective since I retired but the two main organizations I volunteer at are ones I’ve served with for over ten years and I believe deeply in their missions. One is a community college where I’ve seen people lift themselves out of abject poverty by gaining an education that changed their futures. The other is a foundation that provides low income medical care and end of life care. It helps people who have fallen through the cracks in our constantly changing health care system and literally both saves lives and lets people exit this world with dignity. Both of these nonprofits are doing life changing work that I support and believe in, so how can I find volunteering at them to be “less than” compared to my old day job?

Nonprofits are odd ducks compared to for profit businesses. They look like businesses from the outside. The college, for instance, charges tuition and fees to provide a service, such as a certificate or an associates degree in a field. They have employees they pay, teachers, maintenance workers, accountants and others, just like a business. They advertise like a business and compete with other community colleges and four year universities for customers. They look just like a business! The foundation provides medical care with doctors, nurse practitioners and nurses and they also have human resource professionals, IT technicians and administrative assistants. They charge a copay for visits and receive insurance payments for their patients. So both the college and the foundation look an awful lot like regular money making businesses from the outside. But there is one big difference. They lose money! Lots and lots of money. They do not charge their customers what it costs to provide their services, not even close. The college receives most of its income from the government and the foundation makes up for its losses by the investments gains on its endowment. They aren’t just nonprofits, they are negative profit organizations.

For someone who spent his career in a very “for profit” sector, oil and chemicals, it is hard to enjoy the process by which nonprofits do business. The best way I know to explain this is to contrast what my old world was like to what the college and foundation are like. Ambition is a huge driving force in the private sector. I looked at work as a game, with my goal being to climb as quickly and as high as I could on the corporate ladder. This would bring me financial rewards and an increasing amount of control over my job and my company. And that is what happened, I was paid plenty of money, enough to allow me to walk away from work when I stopped having fun. I also had a great deal of control over how I did my job and even in what I chose to do. But in the volunteer world most of the wages are constrained by government payments that do not keep pace with inflation. Add to that the fact that the clients that are being served do not have any money to pay for the services they need.

This basic lack of resources means that the kind of incentives like decent raises, bonuses and stock awards that can motivate corporate employees are not readily available in the nonprofit world. Most college employees are lucky to see a one percent raise. The amount of state money provided to support our college has been basically flat for years while inflation marches on, albeit at a fairly low pace in recent years. And while both the college and foundation have motivated employees it is hard to dig deep and kill it on a project when you know that no matter how hard you work your pay will not be affected. That’s a common millennial complaint in the for profit world but believe me it is far worse in the nonprofit sector. This cannot help but diminish the overall level of ambition, and as a guy who spent his career surrounded by thoroughbreds itching for a race it is not very inspiring. It impacts the overall morale and work ethic of most nonprofits, in my experience. There are a few self motivated true believers who are shining stars but they stand out for a reason, they are rare.

Alignment is another key part of the business world, at least at effective companies. It is critical that everyone understand the mission of the company and how their job ties into the mission. And people know that if they can’t demonstrate that on a daily basis they will probably be out on the street pretty quickly. At nonprofits there is little pressure to conform to a unified plan. Everyone seems to have their own ideas of what the organization should be doing and there is a lot of inefficiency in terms of people not playing well together. Everyone knows that the college has the mission of providing an affordable education to both traditional and non traditional clients but that means something different to every professor or administrative staffer. At the chemical plant we all knew we needed to maximize production, minimize costs and do it safely. The lack of clarity and lack of a coherent plan make volunteer work fuzzy and unfocused.

Excellence was the way to advance in the corporate world. You had to be fast and productive and at the same time you had to be a team player who took care of your coworkers. Living in that kind of world was a lot of fun. You had to be on your game all the time. There isn’t so much of that in the nonprofit world. Standards are much lower because lower pay doesn’t attract the same level of talent as higher pay does. CPA’s generally make more than accounting teachers and an IT professional at an oil company makes more than the same job at a charity. While we have a lot of talent where I volunteer we do not have the same level from top to bottom that I did on my team at the chemical plant. My engineers and some of my hourly union workers were making six figures, more than the highest paid professor at the college. The competition for the jobs at the plant was extreme because the pay was great, and the fact is you really do get what you pay for in this world. And making do with a less motivated and talented workforce can be very frustrating to a volunteer in the nonprofit space.

And finally, the dirty little secret of the volunteer world and of the organizations that accept volunteers is that they don’t really want your help. Don’t misunderstand, they need you because some of their grants are based on having volunteers signed up. But they do not really want you doing their jobs. They see volunteers first as a financial resource. Either because you’ll likely donate some money to them or because you’ll help them secure grant funding. Second you are an amateur and they have no real control over someone who can walk away at a moments notice if they get their feelings hurt, or just get bored. Can you imagine how great an assistant a volunteer would be in your day job? You’d have to cajole and coax them to do anything for you. And that would be exhausting. Face it, there are plenty of things at your day job you don’t like to do. And you do them only because they pay you and you need an income stream. None of that applies to volunteer work. So if you run a charitable organization part of what you have to do is find busy work for volunteers that can’t be trusted or relied on to do anything unpleasant or boring. I’m exaggerating this a little to make my point, but it is critical to understanding why volunteer work isn’t as much fun as you imagine. Volunteers just aren’t a good workforce because they lack the same kinds of incentives that paid workers have, so they don’t get the kind of work they are seeking.

All this may sound like a major downer to you, my bashing volunteering. I do not mean to do that, and I have not reduced my volunteer work in any way. I just want to make it clear that in itself, volunteering, even for very noble causes, does not make up for a lack of purpose in the rest of your life. It simply isn’t enough by itself. It can be a meaningful piece of your plan, but if you are like me you’ll find it brings with the satisfaction, equal helpings of frustration and tedium. I do it because it is important work that changes lives. I do not do it because the work itself is fulfilling, but I do it to give back in gratitude for what education has provided me. And I do it because I can afford the best medical care and I want that for everyone regardless of their income.

Compared to my old corporate job, volunteering isn’t as much fun, most of the time. Frankly I think you’ll find that to be true for you as well. But life is not about just doing fun things. It is about doing worthwhile things. It is about making a difference in the lives of others and volunteering is one way to do that, even if it is a little muddled and imperfect. That’s my take from this side of the retired life.

As usual if you can’t find the comment box just click on the title of the post and it should take you there.

What about you? If you have pulled the trigger on early or not so early retirement have you found the volunteer world to be as lacking in instant gratification as I have?

Or if you are still chained to your job do you have any plans to volunteer some day? If so, are you counting on it to be a major source of joy in your life or will you just look at it as a job worth doing?

You’ve read about it a hundred times, the four percent rule. All you need to do to retire early is to learn to live frugally and efficiently and then save up 25 times your annual expenses. Some very clever people have worked out the math using the past market performance and inflation rates to show that if you invest that much money, and have no debt, you can be retired for thirty or more years safely without earning another paycheck. Four percent of course is 4/100 or 1/25 which is how 4% gets you to 25. I would never argue with any of that, it is after all just mathematics, and as a licensed professional engineer math is my friend.

Most of the blog posts I’ve seen using this algorithm are written by people who haven’t saved up 25 times their expenses yet, so they are future looking posts. They do know their current expenses and generally, by budgeting, they do a great job of keeping their expenses on target. There is that occasional “uh oh” when Murphy sucker punches them with a leaking hot water heater or vehicle fender bender. But a surprising number of them make a hugely dangerous assumption when they are crafting their financial plan toward Financial Independence and Retiring Early. They forget about the time value of money.

To be accurate they do not forget about the time value of money altogether, they are using it to project the growth of their investments, but they do not apply the same logic to their future expenses. How dangerous is this omission? The answer is “it depends”. If your plan is a highly accelerated scorched earth campaign like Mr. Money Mustache followed then it probably isn’t going to wreck your plans. But if you are more like me and took a leisurely path toward financial independence then it could be a fatal mistake. Not fatal in that you are going to die, but fatal in that your plan may already be DOA (dead on arrival).

Let’s look at two examples, one is a ten year plan for FIRE and the other is a 30 year plan to retire. I would assume most of us fall somewhere in between these two goals, with me being one of the turtles who worked for the whole 30 years while many of you are gazelles who plan on whipping across the finish line in ten or less years. In both cases lets assume you are kinda sorta lean FIRE oriented and have trimmed your expenses to $40,000 a year which covers a life that you enjoy and find meaning in. Using the 4 % rule you need 25 times that or 25x$40,000 which is a cool $1 Million when you leave the workforce. Now I’m also assuming you don’t earn another penny after you retire and I’m not counting paying any taxes on your investment earnings so I’m not being entirely rigorous, but I can still make my point.

Let’s start both cases on January 1, 2019 so that the gazelles will hit their $1 Million target in January of 2029 and the turtles will plod agonizingly across the finish line in 2049. Obviously the gazelles will have had to have had a much higher savings rate than the turtles but for my purpose it doesn’t really matter how they got there. The thing that matters is they are both millionaires and since they can live on $40,000 which is 4% of their one million dollar portfolio they are both sitting pretty, right? No! They aren’t. There is a huge difference in the lifestyles they will be able to afford and I can show you why.

We love to show the magic of compound interest in building a portfolio, if the stock market averages 6% growth you can expect your money to double every 12 years. That is the only way that normal people could ever accumulate a million dollars, because their money compounds over time. What we often do not consider is that the time value of money also works against us when it comes to inflation. While inflation has been very low in recent years that isn’t always the case, in fact during my working career I remember seeing several years where inflation topped ten percent and in 1980 it averaged 13.1%! Nobody knows the future inflation rate but most people use somewhere in the 2 to 3% range per year when they correct for inflation’s impact on the future. I’ll use 2.5% in looking at the impact on my turtles and gazelles because that’s right in the middle.

I’m sure you can see where I’m going with this and the numbers are very straight forward. If you have shown you can live comfortably on $40,000 in 2019 and have accumulated your million dollar nest egg by 2029 then you can pull $40,000 and live just like you live now, right? Wrong again! Because that $40,000 that you withdraw in 2029 is not worth $40,000 of 2019 buying power. When you time adjust it to today’s money it is only worth $31,250. So you can only buy that much food, rent, electricity, gasoline, cell phone, lattes and streaming services. That means cutting your budget by nearly 1/4th of what you planned on spending. I don’t know about you but cutting my budget by 1/4th would really crimp my lifestyle. And that is the result on the gazelles who are retiring in only ten years. If you are a turtle the impact of inflation on the real value of your financial target is much worse. For a turtle that $40,000 in 2029 dollars will only buy what $19,000 buys today. You are losing over half of your buying power! If that is not fatal to your plans it has to at least put them in intensive care.

What’s a turtle to do? Or a gazelle for that matter? The answer is not fun but it is also not complicated. If you are a turtle you’ve got to hit two million at retirement in order to live like you live now on $40,000 a year. Instead of 25 times your current expenses you’ll need to save 50 times. If you are a gazelle it isn’t quite so bad, but you’ll still need to have about $1.3 Million invested to provide you a lifestyle equivalent to $40,000 today. That’s the same thing as saving 32 times current expenses.

That’s pretty depressing in one way but it is not really as bad as it seems. For one thing income also rises over time. If you are making $80k and saving half of it now chances are that you’ll be making over $100k in ten years so if you manage to keep on saving half you’ll be saving more money each year and getting to the $1.3 Million will not “feel” any worse than your original path to saving one million. Same thing for a turtle, in thirty years if your pay just keeps up with inflation, and it should do better than that, then your $80k income should increase to over $160k. You may say “You don’t know my boss and my company, not gonna happen!” But while I don’t know your circumstances I do know my own past. I started work when $18K was considered a high salary (dinosaur, I know) and because those were high inflation years I watched my pay go up to $200k and higher during my career. I also watched starting pay for my 18k job go up to 80k for chemical engineers starting their careers today where I worked. I can personally attest to this inflation stuff being real. I honestly lived just as well when I made $18,000 a year as the new engineers starting now do making $80,000. Maybe I lived even better because of the way tax bracket creep works.

So what does it mean to you? Just one thing. When you figure out your financial independence number you need to know what year you will plan to get there and adjust that for inflation. There are all kinds of free time value of money and inflation calculators on the internet and they will all give you the right answer. Or you can just track your expenses every year, a very good idea anyway, and as you get within a couple of years of hitting your target amount then inflation stops making enough difference to matter. You’ll just keep adjusting your target as you see your actual spending go up a little almost every year. If you are a gazelle you still need to do this, because who can afford a 25% cut in an already frugal budget but if you are a turtle on a 30 year path to financial independence it is even more important. Nobody can afford to cut their spending in half for the rest of their life and feel like they’ve won the prize.

One thing that occurred to me while writing this is that because some people neglect to include inflation in their personal finance planning they set themselves up for budgeting failure. If you have a goal to live on $40,000 in 2019 and you make it, great! But in 2020 your goal should be somewhere in the $40,800 to $41,000 range, it should not stay at $40,000. Sure maybe you’ll ratchet down your spending enough to hold the line but your lifestyle will dwindle because that 2020 money just isn’t worth what it was in 2019 and to live the same life you’ll have to spend more. Once you’ve figured out what the optimum amount is for your life you cannot freeze that number, it has to grow with inflation or your quality of life will suffer. And if you aren’t having fun you’ll never finish the race.

As always, if you want to leave a comment click on the title of the post.

What about you, have you factored in inflation into your financial independence target?

Do you give yourself a little extra spending space each year, not for lifestyle inflation but to account for real inflation?

Don’t worry, no animals were harmed in the writing of this blog post! My wife and I joined a few other couples in Colorado to hike the Rocky Mountain National Park last week and have just returned to the flatlands. We enjoyed the relatively cool summer weather in Colorado which was a welcome break from the oppressive heat and humidity of the Deep South in July.

As usual we squeezed in a lot of hiking and as usual we did not take even one day to acclimate to the altitude. We hiked 50 miles of trails over a five day period with most of the trails running from 300 to 500 feet of elevation gain per mile. If you are used to mountain hiking you’ll know that is STEEP stuff. We also generally were in the 10,000 to 13,000 feet of elevation range for most of the treks. Considering our home in Arkansas sits at about 200 feet of elevation it is a pretty good struggle to catch your breath in such thin air, in fact the available oxygen is reduced by over a third at the heights we were hiking, so while it was awesome to see the views, we paid for it with a lot of panting and heavy breathing.

My wife and I are both boomers, but we are runners and competitive tennis players so we are in somewhat better than average shape for our age. Still it was all I could do to keep up with the others in our group. We saw some wildlife, mostly deer and moose with an elk or two included but not as many as we expected. I think the rainy spring and summer has made so much food available that the animals do not have to range very far to find plenty of forage.

As is often the case I thought about how difficult taking a hiking trip would have been four years ago when I was working my old 9 to 5. First I would have had to plan the dates of the trip far in advance. And generally about half of the time something would happen in the chemical complex I ran that would cause me to have to cancel the trip. In fact, a standing family joke for us was that a family vacation was a trip for Mom and the kids, because Dad always ended up missing the trip! That’s not a thing anymore because I do not have a job to go to and I am never on call since I retired.

Also we would have flown because of the time factor of being away from the job, but now we could spend a few days driving and not miss all the interesting things we pass on the way there. I’m not opposed to flying but for my wife and me the drive is half the fun. We’ve seen dozens of unique sights traveling at ground level that you miss at 40,000 feet. The Painted Mines, the Bidi Badlands, Canon City Skyline Drive and the world’s largest ball of twine. Well, actually, we skipped the ball of twine in Kansas and went to the Painted Mines instead.

I’d have also been concerned about the lack of cell coverage on the drive and in remote Colorado. Most likely I’d have received dozens of email and several work calls every day of my vacation and some of those would require a quick response that would be difficult from the top of Mt. Ida or Lulu City. But now, who cares if the phone works? Not a problem!

And try as I might I’m sure my mind would have kept grinding away on whatever big problems were my biggest concerns at work. Being over budget by a few million dollars on the latest project or having capacity problems with some of the equipment or perhaps safety concerns for my people. On this trip I did not worry about anything. The consulting work I do on a very part time basis doesn’t cause me enough stress to mention and it can almost always wait a week without any input from me at all. Best of all there is zero work that piles up when I’m away. Most of the time I could be gone a month and my clients would not be impacted.

At the end of the planned week of hiking we decided to drive about 500 miles out of our way to do some off roading at Lake City Colorado. There is a very cool trail system running from Lake City to Silverton, Colorado that is perfect for Jeeps and side by side ATV’s so we rented a Polaris RZR, just like the one we own, and spent all day riding rough trails through amazing mountain passes. It was a wonderful break for our legs from the extreme hiking and had equally gorgeous scenery. We just came up with that idea at the last minute and extended our road trip for two days. In my old life that would not have been possible, my CEO would have been breathing down my neck about my absence and stretching it longer just to have some more fun? Not likely. But now, we take as many trips as we want. There are no financial or time constraints any more. It is a nice way to live.

Sometimes I take my new life for granted, sleeping in until 8:30 AM this morning for instance, and not having an alarm clock set. That’s an amazing thing, if you are still working I know you probably hate the alarm going off. In my case the only time it alarms is when I’m getting up early to do something fun that I want to do. But the thing about human adaptation is that I have stopped realizing what a huge gift it is to not have to get up and go to work. Same thing about being able to sit here and type this post in the early afternoon while my wife is out playing tennis, that seems normal now and I guess it is my new normal. Since it is now my everyday life I don’t even notice. But before I retired early, there is no way I could be doing this on a week day, I’d be busy in endless meetings at the plant.

Vacation trips are much different in another way as well. In my old work days they were an attempt to squeeze in some time to unwind and find peace of mind. But work always intruded and constrained the joy to less than it should have been. Now fun trips are not so different from staying at home. The scenery changes but the feeling of doing whatever I choose is pretty much the same. Basically every day feels like vacation, in fact better than vacations used to feel, because there is little threat of work interrupting my plans.

Oh yeah, there was the moose wreck, almost forgot about that. One thing hiking allows is the ability to observe wild animals up close. Sometimes a little too close. Our third day out we were hiking a ten mile loop to Little Yellowstone and Lake Verna in the Park. Suddenly a mama moose appeared on the trail right in front of us, and a very large calf followed her out onto the trail. They seemed unconcerned about a few hikers and one went left and the other went to the right side of the trail to munch on tasty vegetation. The calf, which was the size of a horse, not a new born by any stretch, decided he did not like the looks of our crew and bolted back toward mama moose. The only problem was he decided to make a very sharp turn just as he crossed the trail, which was muddy and slick at that spot. He took a major pratfall just like he had stepped on a banana peel and slammed down on his side in the mud. He was uninjured, but I’m sure, very embarrassed. Mama, walked up to him as he regained his feet and looked at the little guy reproachfully. I don’t speak moose, but I’m fairly confident that what she was telling him was that moose have a responsibility to the dignity of the species. In other words “Never fall on your face in front of humans, son!”

These thoughts about “vacationing” as a slightly early retired couple versus what used to pass as vacations are evolving with each year that passes since I pulled the plug on my job. We take the same kinds of trips to the same kinds of places but we do them much more often. The biggest change though, is we are never in a hurry now. We have time to extend our stay, time to add on destinations and time to recover from trips after we get back home without having to rush back to a pile of backed up work. It may not sound that different to you, but to me the difference is in the way it feels. It feels like I always thought vacations should feel, but that they never quite did.

As usual if you’d like to make a comment please do! If you don’t see a comment box then just click on the title at the top of the post and that should get you there.

What about you, if you have retired do vacation trips feel different now?

If you are still working full time do work worries ever interfere with your enjoyment of your vacation trips?