WHO WANTS TO BE A MILLIONAIRE?!
During a casual conversation with a friend over a liter sized German beer at Der Biergarten, he asks me “What’s an IRA?” I almost spewed my pilsner everywhere in shock! My friend does not have a clue about retirement or investing. He’s actually pretty average in this regard: 45% of households have no retirement savings! Let that sink in for a second… In a world where pensions are dead, half of working Americans have no retirement savings!
Not having enough money can be a crushing weight to bear on our shoulders; have you ever had so little you did not know how you were going to pay rent? It is not a fun feeling. I wanted to show my friend that investing is about freedom! Whether you just want to be rich enough to not have to worry about adding guacamole to everything or you want to secure a lifetime of freedom and adventure, investing can help you get there!
Most of us are too busy loving our family, kicking ass at work, and squeezing in the occasional adventure to read up on investing and retirement! Especially when retirement is 30 years away! But learning about investing does not have to be boring or complicated. My goal is to make it relatable and entertaining for you and my drinking buddy. So instead of lecturing him on the benefits of tax-deferred savings accounts, over the next round of drinks I just tried to put things into perspective. He recently got a better paying job working as an EMT, but is still driving around his old beater mustang, so I know he has at least been daydreaming about a new car. I gave him a couple options: “Would you rather drive a brand new Mercedes every three years for the rest of your life, or get a BIG FAT $1,000,000 check in 30 years?”
I’m a huge car fan and have spent hours dreaming of that car, so a new Mercedes is sounding really nice right now; I can practically smell the leather interior through my computer screen. But if I had to choose… OF COURSE I’M GOING TO TAKE THE $1,000,000! With a cool million in the bank, I could conservatively spend $35K every year. Forever. And never have to worry about inflation corroding my purchasing power. Living off the $35K in interest/dividends never draws down that million dollars in principal, so you can still have that million dollar safety net in case of medical expense, or you can spend some more in retirement, or you can leave the million dollars to your children or a charity you believe in. So the real question is: would you rather drive a new Mercedes or have an extra $35K to spend every year forever?
This may seem like an exaggeration, but it is based on what I see everyday. I see it happen at work. I see it happen to friends and family. People love to drive nice cars and once they get some disposable income rolling in it is hard to resist the allure of a new car. After all, you work hard so you should treat yourself right? Hell yes you should treat yourself! Money becomes meaningless if we just hoard a pile of cash and never use it to make our lives better. But before we all get carried away and spend our lives savings on a new car, let’s think long and hard about what else we could do for the cost of driving a mercedes.
After getting a raise at work, my 15 year old 6 cylinder mustang (which I named Betty) was starting to feel a little tired and worn out, I shopped around the BMW and Mercedes websites and found some attractive lease options for $350-$400 a month. I had been saving WAY more than $400 a month, so I was ready to drive down the the automall and do some test driving!
After realizing I would need full coverage auto insurance (instead of the liability only I have on Betty) and that gas, tires, and maintenance were all going to cost more, it brought the $350 per month closer to $600-$700 per month. New cars are a lot more expensive than old reliable ones. I did some Excel gymnastics and worked out that if I instead saved the money it costs to lease a Mercedes and invested it, I would end up with around one million dollars after 30 years (based on saving $600/month and a reasonable 7-8% return). Which brings me to the question: Mercedes or millions?
I decided the new car was not enough fun to justify the costs and my money was better spent on vacations and memories with loved ones. That is my investing goal: freedom to have adventures without having to worry about money! The excitement of a new car would fade pretty quickly, but awesome adventures are hard to forget! So i saved some for a vacation this year and saved some in my ‘freedom fund’ for infinite supply of future adventures!
A MEANS TO AN END
Money is a means to an end. For me, it exists to open doors to new opportunities and
freedoms. If I had no savings, I probably could not travel to Japan for a week and explore all the amazing food in Tokyo or go white water rafting down the beautiful American River. I want to comfortably be able to afford adventures like these forever–even after I decide I no longer want to work.
A new Mercedes sounds nice, but doesn’t an endless supply of adventure without having to worry about money sound better?! You can buy quite a bit of adventure with a million dollars or $35k every year. It’s up to each of us to decide what we are investing for. For some of us, the new mercedes is the goal! And that is totally fine. Just make sure to take a step back every time you make a big financial decision and check to see if your money is better spent elsewhere e.g. a nice vacation is going to make you happier than a new car.
I am certainly not suggesting my friend go hide all of his earnings under a mattress for another day 20-30 years from now, but showing him how investing can be used to secure a lifetime of adventure and freedom. Freedom to do whatever makes him happy–maybe he wants to go on a 3 month backpacking trip every year, or live in a new country every year like an adventurous nomad. Whatever the goal, investing will help secure it.
Depending on your goal, investing can get you there faster than most think. Say you visited Thailand one year and loved the culture, food, and scenery. Loved it so much so wanted to live there. You could retire early in Thailand on $2,000 per month and live like a king! You could still live it up a bit in Thailand for a meager $1,000-1500 per month. If you use the famous 4% withdrawal rule, you only need around $300k to retire in Thailand; for some of you, all you need to do is sell your house and move to thailand already! Worst case: you want to live like a king and want to use a more safe withdrawal rate of 3.5% you would need around $685k. Let’s not forget that in these scenarios we are completely discounting the social security safety net the government says it will provide for us. Personally, I like to totally write off social security so that I am even more motivated to save! Let’s not rely on the wasteful government to take care of us; we can all do a better job looking after our own financial interests.
SO MANY PATHS TO THE GOAL
One of the biggest concerns with retirement savings is the inability to access your money before you’re 60 years old, but there are actually many ways around this! In addition to tools that let you access your retirement savings accounts before you’re 60 such as rule 72(t) and roth contributions, there are numerous other creative ways you can invest outside of retirement accounts. This blog is not about continuously harping on why you should max your 401k or IRA, but utilizing any creative way to grow our wealth and securing that lifetime of adventure and freedom we crave! Some of my favorite ways to grow your wealth are investing in yourself, rental properties, and creative side hustles; my 401k and IRA are just one part of my retirement/freedom fund. If you can not handle the volatility of the stock market, there are plenty of other ways to invest and secure your goal.
We can figure out how to invest later, first focus on finding your investing goals. Putting some money aside or putting in extra hustle becomes a lot easier when there is a goal behind it like ‘freedom to have adventures forever without worrying about money’ or ‘retiring early in Thailand’. Then figure out how much you need saved to accomplish the goal–just like we found that you could retire early in Thailand with $300k saved. Once you find a goal and a number, stop and think before making big financial decisions–is this the most happiness for my dollars? Maybe you will be better off driving your old car and saving a bit more for your freedom fund like me.
Readers, what are some of your investing goals? Do you know how much you need saved to accomplish those goals? What would you do with a million dollars and your own personal $35k/year pension? Whether you are just starting out or close to completing your goal, we would love to hear your story!