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Why ‘How Much Money Do I Need To Retire?’ Is The Wrong Question

By August 17, 2015 Uncategorized No Comments
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You’ve seen the commercials, right? The ones where the people walk around with an orange number floating over their head and the voice over asks things like “What’s your number?” and “How much is enough?”.

While it is important to have a plan and a target, just simply getting to a particular number isn’t really the right question. There’s so much more than that that should go into it.

It’s similar, but in a different way, to when you walk into a car dealership to buy a new (to you because we should never buy a brand new vehicle, right?) car. One of the first things the salesman will ask you is “How much do you want to spend a month?”. That is not the way rich people think about purchases. Especially ones like a car that has significant depreciating value in a short amount of time.

This is a pay as you go mentality. The car guy is going to try to fit your monthly payment into a loan term or interest right that gives him or her all the leverage and gets you to a number you’ve already decided, assuming you answer the question, that you can afford each month. This may have you leaving the dealership with a 72 month lease paying 8% interest but still paying the amount you were comfortable paying each month.

While this doesn’t work well for buying a depreciating asset, when you flip it around and think about how much do you need when you retire, you can put yourself in a position where you’re decoupled from the stock market by diversifying your revenue stream.

The question you should be asking yourself is “How much cash flow do I need to retire?”.

Why is this question more important? Well, let’s say you were 100% invested in the stock market, never something the GRODT Lifestyle would recommend, and you felt your magic number was $1,000,000 to use a round figure. and you retired the day the S&P peaked at 1,565.15 on 10/9/2007 before the Great Recession.

By the time the S&P bottomed out on 3/9/2009 at 67.53, you’d have lost a grand total of 56.6% of your money – or $566,000 (assuming you didn’t buy any more shares in the S&P and not taking dividends into account, which were quickly shrinking in nominal amount per share being distributed as companies desperately tried to preserve capital.

So what happened? You had hit your number of $1,000,000 and in the short span of 17 months from 10/9/07 to 3/9/09, you had lost $560,000 – a sum that likely had taken you more than a decade or a couple of decades to accumulate – in 17 short months!

What difference did it make how much money you had, which was clearly a variable amount as the market dropped precipitously day after day, when your monthly expenses were largely staying the same (and probably contracting as fear set in that the market would never turn around).

This is why when considering “how much is enough?”, you have to take multiple factors into consideration.

My preferred approach is to ask yourself “How much do I need to spend per month to live the lifestyle that you want?”.

Remember, the GRODT Lifestyle is one of abundance. Abundance in happiness, giving, time and financial resources. We want to be good stewards of our capital, but we also don’t want to have to live a miserly, minimalist existence.

Once you have an idea of how much you believe you’ll need to spend per month to maintain the lifestyle that you want, you can start to consider options and the risk associated with those options.

For example, if you want to abide by the 4% rule, you can multiple your monthly target number in retirement by 25 and determine what the total number you need to reach is if your portfolio remained in stocks.

There is significant analysis regarding the 4% Rule, which is backdate tested for over a century that would suggest something would have to happen that has never happened before that would cause you to go bust before you outlived your money. Could something unforeseen happen? Sure. We’re in the midst of some rather unusual stock market action over the last 16 years in that the S&P, including dividends, hasn’t even returned 5% per year, which is historically a pathetic return.

I can’t predict the future. Maybe we’re about to launch into a catch up phase that matches what has been more of a historical norm. I do know we have unprecedented levels of debt in the United States and the world as a whole isn’t any better off. Maybe that can continue for generations. Maybe it doesn’t. Time will only tell.

That is why it is important to have options.

This is where taking the approach of building a diversified revenue stream becomes so critical. This is one of the main teachings, as you know, of the GRODT Lifestyle.

Most of us have 1 revenue stream – our job. If we lose it, our revenue ceases to exist and we have to go find another job.

The more sophisticated of us have Emergency Stashes covering 6 months of expenses, as you’ve undoubtedly read about in my free eBook – 4 Simple Steps to Get Out of Debt! The Stash at least buys you time, which gives you options.

The GRODT Ninjas have accumulated assets that spin off cash flow. This is where you really want to focus on getting to as quickly as possible. This is a multi-year effort no doubt, but is something we should all consider as a way of diversifying.

In my example above about retiring the day before the Great Recession began with $1,000,000 and then proceeding to lost almost 57% of your life savings in 17 months would have happened if you had 100% of your money in the S&P (or our favorite, the VTSAX from Vanguard).

Were you diversified? Yes. At least in stocks you were, in a significant way and it still didn’t matter. This isn’t an exception. Do you realize that since 1950 there have been 17 bear markets? That’s a bear market every 3.8 years on average.

In 4 of those 17 bear markets, the S&P dropped by MORE THAN35%. What’s that telling us? Well, it says that almost 25% of the time you go through a bear market (and we will 100% go through another one and potentially relatively soon in the next couple of years if history remains true), be prepared to lose 35% or more of your investment.

Additionally, 8 of the 17 bear markets lost > 25%.

Finally, 11 of the 17 bear markets lost < 15%.

I have to tell you, I hate those odds when my only sources of revenue are 1) a job and 2) the stock market and, if I’m retired, I technically don’t have #1.

Sure, you can diversify into bonds as well and make that the lions share of your investments even, but that still won’t keep you from losing at least some money. It’s not like the people that were 80/20 bonds to VTSAX in the Great Recession were only losing 10% of their wealth when the market was down 57%.

So how do we guard against this? The main weapon you have at your disposal is diversifying your revenue stream. Having a job, VTSAX, bonds and cash is a great start, but as you know, our goal is to ditch the job as soon as possible.

Other options include building assets such as real estate or rental properties.

You should also consider building a business selling knowledge products or any kind of product that can then be automated with the goal being to automate as close to 100% of the business as possible. That’s a largely unachievable goal, but should be something you should strive for nonetheless. Even an 80% automated business is better than a job and the focus should be to generate as much passive or near passive revenue as possible.

Once you’ve built enough of these assets to generate this type of additional cash flow, you can de-couple from your job and quit going to bed at night HOPING the stock market goes up or the leaders of our country don’t put us collectively so far in debt our economy’s ability to grow is stifled.

You see, you can’t do anything to make the VTSAX go up in value. It’s too big and broad for you to have that kind of impact. However, you can progress in your career to generate more monthly cash flow. You can accumulate cash generating properties by developing the skills necessary to pick good properties and tenants. You can work to rehabilitate properties that are in good neighborhoods and sell them at a profit. You can build businesses that generate what I call MAIL BOX MONEY where by and large, all you have to do is go to the mailbox, open the check and take it to the bank and cash it.

That is what this blog is all about. Leveraging the commonly used ways to accumulate wealth in a smart and shrewd way, manage our expenses and lifestyle expectations accordingly and over time, build great assets that increase in value and generate free cash flow on a monthly basis.

The question you should first be asking is “How much monthly cash flow do I need to not have to go to work anymore?”. Why? Because, when you don’t HAVE TO go to work, you can focus your time on building assets that can grow much faster than the 1-3% raise your boss is going to give you next year.

The next question is “How do I generate additional free cash flow in a low risk, highly automated fashion?”.

That’s jedi level GRODT Lifestyle stuff right there. We will tackle that in another blog post, but after reading this article, you should have a very solid foundation to start building your cash flow empire, step by step, by asking the right questions first and not limiting yourself to your 401k and stock market returns to get to a number that you later have little to no control over.

Have you already started generating free cash flow other than from your job? What has worked for you? What challenges have you had?

Let’s chat about them in the comments below.

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As always, than you for your readership!


Today's GRODT Quote: Turn your to-do list into a to-done list! GRODT