“Saving more money is a brute force solution to the problem of unknown future investment returns. For example, if you assume a 10% return, you may only need to save $X in order to retire. However, if you don’t get 10% every year you will be in trouble…unless you can save more money. At the extreme, if you can save enough money you won’t need any returns (assuming you can keep pace with inflation).”
-Nick Maggiulli, Success By Exhaustion Blog Post
Like most in the finance blogosphere and FinTwit, I have become a huge fan of Nick Maggiulli and his blog Of Dollars and Data; he’s become a regular in the rotation of my weekly mixtapes–right up there with Josh Brown, Morgan Housel, Michael Batnick and Ben Carlson. A couple of weeks back he wrote a post titled ‘Success By Exhaustion” where he explained how “many of the greatest wins in history came as a result of brute force”, and if brute force was able to help IBM win an antitrust lawsuit, Edison to find the right material for the lightbulb and the Allies defeat the Germans, then it could be used to help your finances.
There are a couple of examples in the post, but I want to focus on one particular form of brute force: increasing your rate of savings. It’s hard to debate that more money saved is the type of brute force that helps accomplish goals; the more you save the sooner you are able to retire or become financially independent. In addition to achieving your desired goal sooner, increasing your savings also takes away, or at least reduces, the reliance on the stock market to reach your goals. Be sure to check out Nick’s post below for more and to see the great visuals he includes.
But what if you are not able to save more; what if there’s not enough time for an increase in your savings to have the impact Nick discusses?
First thing’s first, take an honest assessment of your budget to determine if you really can’t save more; can’t is a strong word and many say they can’t do things when they really don’t want to do it. In your assessment of your spending, take time to review the concept of wants vs. needs. If you still find yourself looking for a brute force other than saving more, I have a few options for you, but you may not like them.
In his post, Nick explains,”as the savings rate increases, the number of years you need to work until retirement decreases drastically.” If this is true (which I agree with him), then the reverse must also be true–if the savings rate does not increase, the number of years you need to work until retirement increases, or at least stays the same. Let’s take a look at an example: your goal is to accumulate $1,000,000, which is probably not enough for Millennials to retire on, but we’ll use it for illustration purposes. We’ll make some basic assumptions like a growth rate of 6% and annual savings of $15,000 and $9,000 to examine how the inability to save more can be offset by working longer.
- $1,000,000 savings goal
- 6% growth rate
- $15,000 a year saved
In this scenario, it would take approximately 28 years to accumulate the $1,000,000 goal. Now let’s look at a scenario where there is less brute force from savings, which can be offset by a longer savings period.
- $1,000,000 savings goal
- 6% growth rate
- $9,000 a year saved
In this scenario, it would take approximately 35 years to accumulate the $1,000,000 goal.
Yes, this is a very elementary example and there are a number of factors that can play into your long-term plan, but the intent behind the example is to show how the brute force can be shifted from more dollars saved to more years saving.
If 35 years of working and saving seems too long, I have a couple more brute forces you can turn to. But before we get to these other forces, if you are a Millennial, I’d like you to consider you will probably have to work longer than our grandparents and parents have had to work. A 35+ year career is not out of the question, and I believe a longer career will actually be necessary given where life expectancies are heading. This is a topic for another day, but I’d like to start thinking about changing your view on what careers and retirement will look like in the future…I’ll share my vision with you before long.
Living On Less
If you cannot stomach the thought of a 35+ year career and increasing your savings is not an option, then another option for the brute force necessary to improve your finances is to live on less in retirement. The driving force behind retirement calculation is the annual income needed/desired. Let’s take a look at another example to illustrate how getting yourself to be in a position to require less income in retirement can act as your brute force.
- Annual portfolio income need: $40,000
- 4% withdrawal rate
- Savings required: $1,000,000
- Annual portfolio income need: $32,000
- 4% withdrawal rate
- Savings required: $800,000
Before I get a bunch of angry emails, I know there are flaws with the 4% “safe” withdrawal strategy, and I’m not suggesting you use 4% as your withdrawal rate–this is where a financial advisor can help you determine the best rate for your situation. I’m just trying to show how needing less from your retirement portfolio allows for you to get by with less saved.
So how you can you reduce the amount of income needed for your portfolio?
- Retire with little or no debt, lowering your monthly income need.
- Take expensive trips while you’re still working so the cost can be absorbed while you still have income coming in.
- Knock out any cash intensive projects while you’re still working for the same reason.
- Rethink what your retirement will look like and how you can be happy with less.
There is one final brute force to look to for improving your financial situation.
This final brute force works compliments the force of needing less income from your portfolio: working in retirement. A part-time job or consulting in retirement can bring much-needed income, give you a sense of purpose, keep you engaged with people and assist in the brute force of living on less from your portfolio.
For some, a single brute force will be the answer to improving their financial situation, but for many it will be a combination of brute forces, creating a hybrid brute force attacking from multiple angles. It’s not impossible to figure out the right combination on your own, but if that’s not your strength, there is an increasing number of financial advisors to lean on–a brute force in and of itself.
Be sure to read Nick’s post that inspired mine:
Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimer page.