Friday, December 20, 2019

Retirement Versus Unemployment

There is a big difference between being retired and being unemployed for a while.

I have to hand it to the Financial Kung Fu guy - he published a mea culpa admitting that "retiring" at age 34 was a big mistake, and seven years later, at age 42, he is looking around for a job, perhaps flogging his blog to make a buck or two.  While it would be easy to engage in schadenfreude about this, we should applaud anyone who admits to mistakes - a rare thing these days, in an era where perfection is the new norm, and giving 110% (physically impossible to do) is expected.   If only Donald Trump would say, "I was wrong..." even once, I think people would think a lot more highly of him.

We learn more from our mistakes than our successes, and Mr. Kung-Fu's article is arguably the best thing he has published in his many years of blogging.   All the cheerleading stuff in the past was not nearly as educational or useful as "Hey, this is where I went wrong...."

So what did Mr. Financial Kung Fu do wrong?   Well, just about everything, as he admits.  But here is my synopses:

1.  Age 34 is way to early to retire:  When you retire - really retire - you never work again.  And the earlier you retire, the more money you will need to survive.  So "early" retirement for me, at age 60 isn't that big a deal.  Retiring at age 50, is twice as hard - you are so much further away from things like social security, medicare, and tapping that 401(k).   Age 40?   Really hard - four times as hard.  Age 34 was the year I started my law practice, age 59 was when I ended it.

2.  $3M is not enough to retire at age 34:   For many middle-class Americans, $3M isn't enough to maintain their lifestyle even at age 65.   That works out to about $150,000 a year, using the 5% rule, which is generous.   Yes, that is a lot of money - to me, anyway, I live on 1/3 that, or less.   But for many Americans, particularly those who have a high-buck lifestyle or retire in debt, it is what they feel they need to retire.   At age 34?   $3M is not nearly enough dough!  The 5% rule only provides income for 30 years.  You'd have to go to a 2% rule, or less, to make that last 50-60 years.

3.  Your peak earning years:  When you walk away from a job in "the finance industry" at age 34, seven years later, it will be very hard to be rehired.   Younger people with fresher skills are in the pipeline, willing to work for a lot less.  Not only that, once you walk away from a career at age 34, potential employers are not too keen to hire you on again.  How do they know you won't walk away again, if you get bored or something?  I think that is one reason he is looking to flog his blog - no one is hiring someone who quit seven years ago.   Welcome to my world.  But more than that, age 34-42 are your peak earning years - the time you can make the most amount of money in your life and Mr. Kung-Fu walked away from that.  Better to wait a decade or more before even attempting "early retirement" than to cut off the prime of your life.  Now he has to try to play "catch up" later in life, when people are less likely to hire, and earnings start to level off or decline.

4.  The unearned income fallacy:  In the last decade, everyone made money in the stock market.  As I noted in my blog, it is almost scary how we could go away for a week or two in the camper, spend quite a bit of money, and come home and find our net worth (on paper, of course!) is now $20,000 more.   Sadly, a whole generation has been raised in this bull market, and they've never seen stock prices go down or earnings decline.  Expect them to see this really soon.   Planning your retirement based on a certain high rate of return (particularly from stocks) is flawed.  What happens if you pick the wrong stocks, wrong funds, wrong investments? Retirement is not a time to live off passive income, but to live off the money you've saved.

5.  Retiring with debt:  I did not go into his finances in detail, but suffice it to say, he had a high-dollar lifestyle.   It appears, based on his comments on how much it cost to live in San Francisco, that he had a mortgage - no doubt buying into the "opportunity cost" argument that the money spent paying off a mortgage could earn better returns in the stock market (over the last few years, anyway).  But that means you have a higher cash-flow requirement, which means having to make more money and pay more taxes.  And no, the mortgage interest deduction doesn't make it wash.

6.  Living Stingy: Speaking of living in San Francisco, in order to retire - really retire - you have to cut your living expenses to be in line with your income and savings.   Mr. Kung Fu probably could have retired on his savings, if he sold the expensive house in the most expensive city in America and moved to somewhere cheaper.  And that doesn't mean a trailer park in Oklahoma, but just some place where the cost of living isn't astronomical.  I live on a resort island, and it is affordable, mostly because I have no mortgage, which means I take little from my 401(k) to live on, which means I pay no taxes and get a huge Obamacare subsidy.   You can't retire with a high-dollar lifestyle.    When the time comes, I will gladly sell the house I have here, cash out a half-million and live on that for a few years (a decade at this rate) somewhere a lot cheaper.

7.  Health Insurance:  One reason I was able to retire before age 65 (not that I had much choice) is that Obamacare subsidizes health care premiums.  So long as I keep my taxable income below about $70,000 I will qualify for a subsidy.  If I can keep it near $30,000, maybe a full subsidy.   Again, the high-buck lifestyle means only paying more taxes and paying more for health insurance.  How much more?  Like ten or twenty grand a year.   And if you have a family, a lot more.

8.  Having Kids:   Again, 34 is way to young to retire - this is the age you should be starting your family, not winding down your life.  Children are amazingly expensive - or as expensive as you want to make them.   As I noted in another posting, a family in the bay area complained that they were living "paycheck to paycheck" on $350,000 a year, because their daughter's pre-school was costing them twenty grand a year, or more than most folks spend on a year of college.  You can have kids on the cheap and not be guilty of child abuse - in fact, most Americans are forced to do this by necessity.  But a better bet is to work during those child-rearing years rather than try to retire first.   It sort of puts the cart before the horse!

* * *

There are a lot of blogs and forums out there about "extreme" early retirement, or Fire-y this or that, and most of it is utter bullshit.  One forum, as I noted before, claimed you could live on $7000 a year or some such nonsense, which is less than even homeless people live on. Yes, it all seems so plausible, if you've come of age since 2008, that markets will always go up, and you'll always make money on your investments.   But that is not a realistic view of life, and I'm sad to say yet another generation will be deer-in-the-headlights as the previous one was, in 2008, when it all came apart.  "What do you mean, housing can go down in value?  It always goes up!"   Oh, well.

Yes, I've known a few people who have retired very early.   A friend of my Dad's went to work for Aramco after the war, and banked every paycheck he had, while living in Saudi Arabia.   In his 40's, he bought an inexpensive piece of land in the Adirondacks and built a log cabin (more of a lodge) himself.   He already had a modest but paid-for house elsewhere.  He drove Volkswagen beetles because they were cheap, and he made a game out of seeing how little he could live on, and yet still live large.   You can retire early, but the earlier you retire, the bigger pile of money you need and the cheaper you have to live.

Another friend who retired early inherited a trust well into the eight figures - tens of millions of dollars.  Yes, they could retire early, raise a family (well, one child, in their case) and live comfortably and live large.   Harder to do that on three million.

But for the rest of us mere mortals, we have to make sacrifices to our living standards to live within our means - or within our retirement income.   Most of us don't have a choice about this - retirement is thrust upon us, unexpectedly, before we are ready.   It is the norm that you will be forced to retire at a time and place not of your choosing, often in your 50's when your skills age and your costs increase, both in terms of salary and health benefits. Although we are in an era of record low unemployment, I could not find work in my own field, even if I chose to do so.  Like Mr. Kung-Fu, I would have to find a "new gig" to make money.   You want fries with that?

I am sorry to hear of Mr. Kung-Fu's setback, particularly since it means he will be monetizing his blog even more. I am sure he will have some swell recommendations for credit card offers, very, very soon.

I would suggest he get on one of these reality shows - they keep calling me and asking if I will come on as some sort of stingy crackpot.   Maybe we can both go on such a show and throw "shade" at each other.  I am sure the ratings will be boffo.

And of course, there are other opportunities to cash-out on a blog.  I get regular queries to allow "guest postings" or to post entries lauding products or services - offering me anything from zilch, to $75 to a bag of potato chips as a reward.   Some bloggers and YouTube vloggers make thousands, even millions this way - one seven-year-old makes millions just playing with toys on YouTube.  Well, his parents make it, anyway.  Hope they didn't "invest" it all in bitcoin!

So I am not worried about Mr. Financial Kung Fu.   Now is the time to cash-out!   And when it comes to cashing out, financial blogs are in high demand - even moreso that car blogs.   Because if you can hook a viewer on some sort of product or service in the financial sector, it is far more profitable than selling them a car or car accessory.  Ask the Sooze Orman how this works.

Of course, this means I would take his advice, from here on out, with even a bigger grain of salt.