The fact that it takes a moment to figure out if it’s a financial commercial or a Viagra ad is enough of hint that drugs are being sold in both cases.
When I introduced the Moontower Retirement Model, I mentioned how destructive I think the whole vision of retirement is as portrayed by Charles Schwab commercials.
Retirement Is An Unsustainable Idea
The average American’s savings are inadequate to even cover an emergency. Forget having enough savings and social security to survive with dignity from 65 to 85 or 90. The presumption that investment returns will make up the shortfall even if everyone invested is fragile at best and quite likely nonsense. Despite a scorching decade of investment returns, pensions remain underfunded. It would take astronomical valuations for assets to balance liabilities. And if markets permanently reset higher, it would guarantee that any newly formed promises could not be kept with a straight face. People are living longer. An increasing share of work is done by sitting in front of a screen. The classic idea of retirement has outlived its usefulness. It is a vestige of a bygone era and was targeted at people who did back-breaking work. In fact, our modern conception of retirement is a Frankenstein evolution from 1800s rail workers (I summarized Charley Ellis’ history of the “retirement age” in Origin Of The Pension Crisis).
To see why the traditional concept of retirement is obsolete let’s start with a macro perspective before moving to the problem on an individual level.
Broadly speaking, a dependency ratio is the percentage of people in a population being supported by the productive portion of the population. So if the ratio of youth and elderly is high compared to the working-age population then the dependency ratio will be a larger percentage of society. It is well-known that birth rates have been falling across all developed nations. Asia, Europe, and the US all face demographic headwinds with respect to their economies. The poster nation for an aging population is Japan. Challenged by low birth rates, low immigration and the lost decades that followed its late 80s bubble, the fate of Japan’s elderly has been dire. Hiding grandpa’s body to keep the pension payments is desperate.
In The Mystery Of Japan’s Missing Centenarians, we see a grim future. Japan’s over-65 population is expected to cross 40% by 2050. Less morbid solutions than pension fraud are playing out. Dependency ratios in Japan are starting to decline after more than a generation of increases. But as Joachim Klement explains in Following In The Footsteps Of Japan, the reason is not cheerful — Japan’s elderly are re-entering the workforce. Klement doesn’t believe that demographics are fate and he warns against overfitting Japan to the US (in this interview, Lyn Alden, lays out many reasons why the comparison is limited). But the necessity of elderly people needing to work because their investment returns were inadequate is a visceral risk for anyone set on retiring in their 60s or earlier.
This brings us to how to think of the “retirement” problem on an actionable, personal level.
The Nastiest Hardest Problem in Finance
That’s what Nobel-prize-winning economist William Sharpe calls the retirement problem. Solving for how much you need to save and for how long, solving for how much you can withdraw annually and for how long, all so you don’t outlive your money. If you have walked through the Moontower Retirement Model you learned the levers — savings rates, longevity, and post-tax inflation-adjusted returns. Every one of those terms is impossible to forecast. The problem suffers from intractable amounts of garbage inputs. The value of the exercise is not the outputs, it’s for articulating the problem in the first place and gaining a low-res appreciation for the sensitivities.
Khe Hy has tortured his own retirement models and instead of Excel confessing the answers, Khe confessed the same unnerving conclusion that Sharpe did — it’s too hard to calculate. In There’s No Such Thing As “The Number”, Khe points out several issues:
- Let’s work backward and assume you’re a 77-year-old (male) RadReader. The average life expectancy is 78 (81 for women) so, on average you have 1 year of life remaining. Forecasting your expenses and investment returns should be pretty straightforward, right? Well, any good statistics geek will know that averages don’t paint the full picture. In fact, the standard deviation of life expectancies is 15 years. This means that our 77-year-old homie has a 34% chance of living until he’s 92.
- The people who love this analysis the most face some of the greatest uncertainty. The post-MBA. The post-MBA will have the most uncertainty to codify into their model. Will they get married? Have kids? How many? Will they both work? Where will they live? Will they ever change jobs? These are the personal variables; what about the global ones like inflation, tax rates (and not just individual rates, i.e. the SALT effect), market performance, and entitlements (will Social Security even exist?). Plus, they’ll still need to forecast the 68% chance they’ll die somewhere in between 62 and 92.
- And if you’re still unconvinced about the difficulty of this calculation, it doesn’t get any easier for retirees. In fact, retirement spending isn’t linear, it looks more like a smile: It starts high, gradually declines, and then increases toward the end of a retiree’s life.
- There is one way to try to make The Number work: by assuming the most conservative approach to every variable. Khe calls this the Max() Approach. If you are impossibly risk-averse or suffer from a “scarcity” mindset, he and I have bad news for you. Especially if you are a salaried employee (which is more likely if you are extremely risk-averse). You will never hit that Max(number) that will let you sleep at night. Sorry. And the more expensive markets get, the less help you get from returns. Sorry yet again.
Khe shares my conclusion. The answer isn’t in the spreadsheet. The answer is in your approach to life.
The Key To Sustainability: Your Human Capital
The policy level debate should focus on delaying retirement ages. This will not feel fair to anyone nearing retirement and will especially disturb droves of Americans who see their working years as something to just get-over-with. But you cannot manifest higher investment returns just because you need them. You might live a long time. Your kids will almost certainly need to work longer than prior generations. You must expand the time horizon of your earning life. It’s one less year of drawing down on your savings plus one more year of savings. That’s a double-whammy of benefits for every extra year you can work.
If you have thus far thought of your career as a race to a finish line you are having an allergic reaction to this. That’s all good. Some of you are close enough to the ribbon that you can ignore me, especially if this last decade of returns has been kind to you. . But for many of you who are young, you should not be using your parents’ template for your own. And if you are middle-aged like myself and fortunate enough to have built a cushion, do you hang on for 5, 10, or 15 more years? Any 40-year-old who mostly works for money grapples with this. You have either imagined alternate paths and decided it wasn’t worth it, you’ve made a leap, or you are still deliberating. But you have definitely visited this problem in your head.
I hinted at it in WFH: Deux Ex Machina. Covid shutdowns offered an opportunity for reflection. Reflection about where to live and how to work. It halted the treadmill so you could think about aligning your working life to your living life. I wrote:
An emerging efficient frontier trade-off between salary and location offers a promise of better-centered lives. We should agree that matching ourselves to our environments is a public good. A sustainable balance means we can work more years. A double bonus. We save for more years and withdraw for fewer years. It is the only viable solution to the pension crisis. If remote work means more sustainable working lives then WFH will be the pension crisis’ deus ex machina. And that’s a bigger cause for hope than the short-run sprint of getting paid SF wages while Zooming from a lakeside cabin.
The key to the pension crisis is the same as the key to our professional crises’ — sustainability. Unlike the “number” in the spreadsheet, sustainability doesn’t rely on interest rates or 529s. Sustainability rests entirely on your human capital. Khe nails this:
Tending to one’s craft, learning new skills, and creative problem solving are key components to leading a rich and fulfilling life. So why on earth would 30 or 40-somethings want to stop pursuing these activities?.
There is always work to be done that utilizes your talents and appeals, at least abstractly, to how you think and what you enjoy. It doesn’t mean it’s easy to identify. But finding it is a technical problem. A technical problem can be broken down into smaller steps and attacked. Doing that is beyond the scope of this post, but you should be comforted that this problem can be solved. And the best part — the payoff is a sustainable life! That’s a successful outcome no matter what other variables you pass to Excel.
The Payoff Of A Sustainable Approach
Internalizing a truly long view will change your relationship with risk. It will lift the pressure you place on:
- your next performance review
- your portfolio returns this year
- the fact that you haven’t read a book in 2 years
The idea that you can work until you are 75 or 80 is freeing IF you can do it on your terms. If you can take a break for a year sometimes. If you can work 4 days a week, or from wherever you want. If you actually enjoy bringing your uniqueness to the job to be done. The definition of a sustainable life is one you actually want to sustain. Nobody wants to sprint forever, and sprinting for a short while doesn’t make the scarcity mindset go away even if you “win”. This is partly why rich people fear inflation. They thought they were “done”. What is “done” anyway?
My disdain for retirement, the “R” word, comes from its insidious focus on a future that doesn’t exist. A future where you are a different person who suddenly gardens or plays piano. The reality is your retired future is spent worrying about new things. Your health. Your fixed income. The dream of retirement is sold in an opiate-of-the-masses manner. Like heaven and its pearly gates. But everyone knows the anticipation of a vacation is better than the destination. Why do you think it would be any different with “retirement”?
I’ll turn to Khe’s post one last time:
I love asking people in pursuit of The Number a simple question: If you won the lottery today, how would you spend the next five years of your life? Most people cannot answer this question. Five years is a long time, too long to pick one activity (family, travel, exercise, sleep) and do it for an extended period.
Harvard Business School professor Theresa Ambile interviewed 120 newly retired professionals and found that the things that made them happiest in retirement were quite simple: not using an alarm clock, the ability to pursue a hobby, not needing to commute and the flexibility to spend time with family.
This is where the your secret arbitrage comes in. The pursuit of The Number is a complete distraction. In fact, it’s worse. It’s sending you on a wild goose hunt in the wrong direction – taking precious mind space away from you finding the intersection of 67 weekly hours pursuing interesting work, with cool AF people, while retaining basic life flexibility.
Permission To Speak Freely
I’m going to be 43 next month. I left the race 3 months ago. I’ll just splatter my thoughts.
I’m still trying to understand it. Sometimes I think about just how random life is. Any career you fall into to will feel like a historical accident. If you thrive in that career, you will probably come to like it more and stay with it.
And voila…21 years flies by.
I used to love trading. Somewhere along the line, it lost its luster. I didn’t have what I wanted to give it. I grew bored of the video game. I used to get up in the middle of the night to trade. I don’t even want to follow prices on a daily basis anymore. I watch many of the active trader accounts on Twitter and think how exhausting that looks. I don’t think what I’m feeling is burnout. It’s worse. It’s apathy. I struggle to draw a line between making myself (and others) richer and my own happiness. Motivation became blood-from-a-stone.
For some, the thrill of winning is reward in itself. Sure. It’s a great feeling to win, but I also think Michael Jordan is a sociopath. I can marvel without admiring. I’m never going to look up to win-at-all-costs types. Many believe the “ends justify the means”. More often than not, I think that is a self-serving rationalization. I’d concede that there are cases where it makes sense. But they sure as hell aren’t in the hedge fund world.
My career choice was highly optimized for money (actually money per hour, otherwise I might have considered banking). I never understood my sister who wanted to become a veterinarian since she was a child. And did. Now I marvel at how mature my sister was to not aggressively seek money. The lack of cash created so much tension at home when we were growing up. Our parents worked so much. They didn’t get to enjoy us the way we enjoy our kids today. And the grind eventually wore their marriage down.
So I went money-hunting thinking it would save me from my parents’ fate. When I was 21 I told my mother I’d retire by the time I was 40. But once I satisfied some sense of financial security, money was not especially motivating. It helps to not care about fancy cars. The only financial goal I had remaining was optionality. Now you understand where that essay came from.
I was faced with the yuppie conundrum…last a few more years and hit “the number” or…what? What do you do if you hit “the number”?
It’s not going to get any easier to answer that question later. In fact, I’ll probably feel the same way then as I do now. Financially pretty good, but a bit lost. If anything, I’ll be more likely to be in “protect” mode. Protect from inflation. Protect from “socialists”. Protect from whatever bogeyman people who have lost faith in their human capital fear.
I’m not interested in complacent protect mode. I am hypochondriac enough to know whatever I can offer to the world will fade one day. I’m not sure what I want to do but I know that I always want to think, create and solve. If I’m going to do that later anyway, then what difference will a few extra bucks in the flat part of the utility curve make? Sure the pressure to monetize might be a bit higher but that feels like a technical problem. And the faster I get to a journey that I know I’m going to take anyway, the better off I’ll be. The whole “we underestimate what we can do in 10 years” thing.
There’s an apocryphal bit of advice to writers from novelist Raymond Chandler:
When stumped, have a man come through a door with a gun.
I basically did that with my life. I left without a plan. I am not recommending this. I disappointed people. People I care deeply about. They understood. They care about me and want me to do what’s best for me, but if it’s bittersweet to me, it’s more bitter for them. I get that.
My wife is thrilled for me. For us. She knows. Our kids are young. She took a year off several years ago. It was amazing. One parent at home means a lot more slack in the domestic system. It’s a luxury if you can afford it. My mother was a single parent for a good chunk of our childhood. The contrast is totally unfair. Exercising the option to be underemployed is expensive but I like the payoff better than a Lambo.
When I was a kid, I had a specific marker for class. The parents who picked their kids up vs those of us who took the bus. I was always jealous of the kids who got picked up (or got pulled out of class to go on vacation for that matter). Today, I drop my kids off at school in flip-flops. This feels like an enormous privilege just as I imagined it. The fact that my 14-year old beater is sandwiched between the neighbors’ literal Lambos and G-Wagons (gag me) makes no difference to me. This is what I wanted.
As far as risk, if there was a pressing need for income I’m confident I could get a job where I wouldn’t starve. Unless I launch a successful business, my peak earnings are probably passed. I’m not naive. My professional track record is something I’m very proud of. I hang out on Twitter a bunch. There’s always a question of whether people are full of shit. I’m confident that if snoopers inquired at my track record with employers or investors it would only boost my rep. That’s definitely a flex. Maybe one I need for myself. Because that’s the end of a very specific life.
Whatever comes next, I’m a beginner.
I Wasn’t Alone. You Aren’t Either
I’m not sure what’s next. And I’m fine with that. I know many of you might feel like I do. I’m always happy to discuss it. Any aspect of it. It wasn’t always my mindset to be that open but I give a lot of credit to my friend Khe. His openness not just in his writing but via conversations really helped me think through my own issues. Without realizing it, he gave me a model of openness for others. He wrote a lot on these topics when he made his own leap and while he doesn’t write about these topics today as he has evolved well into the next phase of his life his writing on career transition and everything it touches including relationships is absolute GOAT. I recommend looking it up if you are contemplating a change.
I also recommend the writing of Paul Millerd. His recent post The Case For Sabbaticals is A+. Paul is deeply thoughtful on these topics and like Khe has the experience of so many others to draw on as his work has become a beacon to many readers trying to make sense of how their talents can be amplified, shared, rewarded, and sustained in the long-run.
If you have been following along, and reading between the lines, several of my recent posts have apparently been building to this one. If you want to read them in the order I published them, here you go: