I hate to break it to you, but you can’t save your way to early retirement, and I mean that in the context of frugally finding a few hundred dollars every month that you put into an account earning negative real rates of return. The reality of inflation leaves you with few options; risk your capital to earn positive inflation and tax adjusted rates of return, or dramatically increase your earnings power to the point that you are so wealthy and rich that return of capital is more important to you than return on capital.
In other words, a man with $100,000 dollars cannot afford to discount the purchasing power destruction of inflation. Conversely, a man with a $100,000,000 cares more about preservation of capital than return on capital. With this much principal a 3% yield would provide our lucky ducky with an annual income of $3,000,000, he isn’t in danger of being reduced to a pauper through any means of purchasing power erosion, unless he was an immortal or a mega-zombie with cognitive powers. Although, even risk averse immortals with infinite lifespans aren’t immune to the mathematical inevitability of inflationary induced poverty.
Faced with these facts what are we to do? A cushy cubicle job, the sort I have that is paying for this blog, isn’t going to provide me with the massive amount of financial capital I would need to raise my middle finger to inflation and globe trot around the world. That 401(k) match I’m receiving isn’t going to do me much good until I retire and I’m old enough to take qualified withdrawals (I’m 29 and I’d like to retire by 40, if you’re older than me wouldn’t you like to retire earlier than the traditional age of 65).
“They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety” -Benjamin Franklin
It seems Franklin, famously a fore-fathering founder who frequently finds his way into the folds of your wallet, was on to something. Trading time for dollars and saving a portion of those dollars is probably the safest and easiest thing for most people to do. Do you want to be free, or do you want to be secure (security, without freedom, is a euphemism for slavery)? Aside from the CEOs of Fortune 500 companies, how many people do you know who are fabulously wealthy from the income they derived during their existence as a cog in a corporate machine? How many entrepreneurs do you know of who made it big without taking calculated risks and having multiple contingency plans? In the world of finance and entrepreneurial endeavors, security seeking individuals will never be free!
Now, now, I’m sure there are those who may disagree so allow me to define my philosophical point of view regarding riches and wealth.
Rich – the amount of capital you control and absolute purchasing power relative to everyone else.
Wealth – the amount of time you can maintain your current standard of living, without working and living solely on passive income, before you run out of riches.
Most people go through life without defining or contextualizing either one of those words, and if you are not taking the time to define how you perceive reality, someone else is going to define your reality for you. If my definitions don’t jive with the way you contextualize reality, create your own definition, just make sure that it isn’t the definition arbitrarily assigned by some political party, president, friend, family member or outside influence. You are your own greatest influence. Yet I digress.
In the sense of my definition, I know tons of people who are relatively rich. Working in finance I meet these people all of the time. People higher up the corporate ladder making $500,000 a year, 50 years old and a total of $1,000,000 in savings. An individual like that dwarfs me in purchasing power, yet isn’t very wealthy in my eyes. He would last a grand total of three years at his current standard of living and an 8% rate of return, and we didn’t even factor in taxes. Personally, I don’t buy into the argument that people spend less money during their retirement years. Who goes into retirement thinking that they want to reduce their current standard of living?
Contrast that to an individual who is wonderfully wealthy. A baby booming grandmother who has $1,000,000 but lives on $20,000 per year like it is still the great depression. Nothing wrong with that, that is simply how she perceives the world and why she is wealthy to begin with. Frugality is important to an extent, in my opinion it is probably one of the most painful paths to riches and wealth.
Which brings me back to my original statement, “You can’t save your way to early retirement.” In my previously defined context of riches and wealth, I want to become as rich as possible as fast as I can, with the least amount of pain and the longest duration of wealth. For me to think that I can save my way to my contextually ascribed definition of riches and wealth would be nothing more than crazed cognitive dissonance.
I’m not knocking those of you who are savers, in fact, given my financial situation I am a saver myself. It is painful but I know that it is good for me, I save for the same reasons I am a runner and hit the gym. However, I am not looking to accumulate riches and wealth merely for the purpose of obtaining riches and wealth. I want to acquire riches for its tangible material benefits and wealth for the freedom and flexibility of time. Riches and wealth are the only way to be secure in life, and you are free to determine how rich and wealthy (and your relative security) you want to be compared to everyone else.
It is easy for people to misconstrue my way of thinking for greed; unfortunately, whose definition and context are they assigning to the word greed, the man named Webster? Let me show you how I define it.
Greed – a group or individual who seeks to obtain tangible or intangible benefits from another group or individual through means of force or theft without a meeting of the minds or the exchange of something of equal, or perceived greater, value.
I’ll probably get flamed for this, but these days my definition can be applied to a multitude of individuals, groups, politicians and their associated parties and governments. When two or more individuals transact and a meeting of the minds has taken place both parties are richer and wealthier. Greed is the great destroyer of wealth, taking from one without providing value and without a meeting of the minds results in one party that is richer and wealthier at the expense of the other party who is now poorer and subsequently less wealthy.
In my own life, I have made a commitment to myself to be a provider of value, as an individual I want to ensures that anyone who interacts with me on a voluntary basis is richer, wealthier and, (hopefully) wiser. All I need to do is provide enough value to enough people and I’ll have more than enough riches and wealth to last a lifetime.
Riches, wealth and greed. How do you define and contextualize these three words according to your own perception of reality, and if you haven’t taken the time to do so, why haven’t you?