Many of my friends have a specific number in mind that will “allow” them to retire (very big of that number to “allow” these friends control over their lives…someday). The standard cliché is that you need to save 25 times your annual expenditures in order to safely retire, i.e., if one has a $40,000/year expenditure rate, they need to save $1,000,000 to retire comfortably.
This kind of logic produces some interesting behavior. To wit: if your annual expenditures are $150k, you need $3.75m saved before you can retire. This means that if you have saved $3m and are facing corporate layoffs, the natural solution is to desperately try to save your job through 80 hour work weeks, last ditch ass kissing, ethically compromised decision making, all the while gobbling handfuls of Ambien every night just to manage 5-6 hours of sleep (I have actually seen this happen).
Sound like a good savings plan?
As per usual, Contrarian Saver has a solution that will let you retire on just 20x your annual expenses…no wait 10x…no wait 1X… no wait .2x!
The reality is, the “number” doesn’t mean anything. It was created by the financial advisor community to scare people into putting away as much money as possible, so they can max out their 2% annual commissions on as much money as possible – even if it means encouraging their clients to work until they dropped dead of a heart attack to reach said number.
What then, is the solution?
It starts with a question.
If you are spending, say, $12,500 per month, why wouldn’t you just create income streams, which (after all expenses) simply produced $12,500 per month? Then you wouldn’t need to “save” anything. Literally speaking, once you have these income streams, you could just automatically deposit them into your bank account, put all your bills on autopay, and spend the rest of your life lying motionless like some sort of Kardashian.
You could even, technically, produce this $12,500 with a net worth of zero. Let me show you how through one possible example:
Say you own a 30 unit apartment building that is generating $65,000/month in rent. You paid $10m for it, $2m down and the remaining $8 million at a 4.5% mortgage. Your mortgage, taxes and expenses are $52,500 per month, so you are netting $12,500.
The said apartment building’s value drops by $2m, say due to new tax laws that make multi-units a less favorable tax shelter. You still owe $8 million and the building is worth $8m, so your net worth is zero. Yet you are still collecting that rent. And still don’t have to work 80 hours a week to reach some mythical “number” – you have already achieved FI! With a “number” of zero! Congrats!
Then, when you meet your buddy at the bar, the one that brags about his $3m net worth but needs to sell his soul to achieve that last $750k, you can say: “Hi there! You look like you haven’t slept in weeks, so would you like a few of my Ambien? Even though my net worth is $3m less than yours, and is in fact, zero, I live the same lifestyle and spend my days, not working, but simply staring into space and at night I sleep like a baby – so you need these more than me!”
If you really want to kick your buddy while he’s down, and say, that 30 unit building has declined in value by $2.5m, giving you a negative net worth, you can then point to a homeless panhandler outside the bar and say “I am worth less than THAT guy… but am spending the summer, as always, in Paris. Talk soon!”
There may be those of you that are more literal minded, saying “I need to sell my soul because I can’t buy a 30 unit apartment building”. Well, fear not – there is always the combination strategy: meet your monthly expenses through a combination of revenue streams and savings. For example, if you need to cover $10k/month in expenses, invest in two properties netting $2k per month each, and save enough ($1.44m) to cover the other $6k. Your number can actually be reduced even further if you factor in social security, pensions, etc.
So by all means, if you enjoy saving, no matter what sacrifices are entailed, go for that magical “number”. But just know that there are many, many, more (and faster, and more fun) paths to FI than enslaving yourself to a random integer.
Have you freed yourself from the tyranny of “the number”? Tell me all about it in the comments below!