When can you quit doing shit in life that you hate doing?
Here's a back-of-the-napkin trick to contextualize how close you are to living like our industry's hero, Mr. Buffett.
Jimmy Buffett.
Financial advisors used to focus on helping clients determine what type of life they could afford at an age 65 retirement — i.e. a prescriptive amount you could spend annually until you die (with a high probability of not outliving your money), based on assumptions about inflation, age of death, rates of return on assets, etc...
Nothing about that math has changed. But people have changed. And priorities have changed. Most of the families I work with are younger, and have deeper, existential concerns about life's unquantifiable tradeoffs.
My clients don't want formulaic age 65 calculations.
They want to know when they can afford to redirect how they spend their limited time on earth, and quit doing shit they hate doing.
They're tired of stressful jobs, tedious commutes, time away from family, never having time to read, and living in a world of screens. They're tired of being depleted by professional duties. And wherever investors are on the spectrum, from rabid financial-independence-retire-early (FIRE) fans to people just generally open to a less traditional retirement glidepath, investing is how you buy optionality.
No one does less shit they hate doing than the caricature of Jimmy Buffett. French fries and frozen cocktails and palm trees and literally doing whatever.
We all have some version of daily unbridled enjoyment...our own Jimmy Buffet-lifestyle (embarrassing disclosure: my own version borrows meaningful elements of Jimmy's).
Here's a high-level, back-of-the-napkin way to consider guaranteeing yours:
How much money can you live happily on?
If your portfolio is risk-free, how much money can it earn?
Here are the last 20 years of the 10-year risk-free rate:
[Nota bene: we'll use 10-year yields as a proxy, theoretically...you'd want to match your timeline to the same risk-free maturity, e.g. 7 years or 17 years]
Currently, we can earn 3.72% guaranteed for each of the next 10 years. Unfortunately, inflation matters. Consider that if we have $1M, $37,200 annually might be enough to live on right now, but it might not be in 9 years.
So we add after-inflation risk-free rates (called "real" rates), currently 1.56%.
Whatever happens with inflation, real returns will adjust, earning 1.56% on top of it.
By holding inflation-protected treasuries to maturity, we've controlled interest rate risk, default risk, and inflation risk.
This is peak Jimmy Buffett — an extremely low anxiety portfolio.
We are at the tiki bar.
Unfortunately very few people can endow the rest of their life on risk-free rates (nor necessarily should they). The rates are too low, meaning while it's a "safe" portfolio from an asset perspective, it's a super risky portfolio from a living-the-life-you-want perspective.
You likely need to accept some asset risk to increase the probability of achieving the life you want. Financial plans that contain risk assets (i.e. almost everyone's) require additional critical assumptions, like inflation and returns for stocks or real estate [here is a helpful podcast about expected returns on assets], and the key is we are always likely to be somewhat wrong about them (especially over the short-term). There's uncertainty.
Whereas the safeguarded Jimmy Buffett portfolio has predictable outcomes because the expected amount of spending power earned from real risk-free portfolios closely aligns with future realized outcomes. The cost of that clarity is paltry returns.
You'd have to already be extraordinarily wealthy and with a modest lifestyle (and it would also help to already be old) to only own real risk-free assets and never run out of money.
What investors really should work toward is confidence in a low-ish probability (but not zero) of ever running out of money.
Risk isn't a bad thing. We just need to align the types of uncertainties we accept to our goals and timeline.
One critical inflection point to consider occurs after adding reasonable assumptions for inflation, age of death, rates of return for assets, taxes, Social Security income, etc...
It's the moment when we are no longer working, but we still expect our portfolio to grow by more each year than we expect to spend it down.
This can provide for an incredibly relaxing life.
I hope the back-of-the-napkin trick of creating a risk-immunized baseline is helpful. It allows you to consider what future spending power you may already have the ability to guarantee (even if you wouldn't typically want a portfolio that does that). Adding assumptions adds variability, but of course the reason that financial plans not done on napkins are more popular is because they're more realistic.
Remember — it's always possible that stocks go down for longer than we expect, or that real estate performs nothing like it did in the last 20 years for the next 20 years. No one knows the future. So a Jimmy Buffett portfolio is helpful context because it shows the cost of avoiding that uncertainty, but removing all the traditional risks is unlikely to earn enough to endow your future needs.
The BIG takeaway, moving beyond the napkin, is that when you make assumptions inherent to realistic financial planning, you want as big of a portfolio as possible in case those assumptions don't turn out great. Buying optionality isn't just to enable quitting crappy jobs and spending more time with family. It's also for portfolio buffer.
The more money you have, the less correct you need to be with market assumptions to still live the life you want. Even better, your assumptions turn out reasonably correct, and you've bought the ability to do whatever the hell you want with your time.
Just as expected.
End.
