Sunday, October 7, 2018

The New Retirement aka. Time Value of Money

Suze Orman just came out and said that at minimum a person needs $5 million to retire early. The internet blew up. Her audience has now been reduced to 2.5% of the U.S. population, because $5,000,000.00 net worth was at the 97.5% percentile in 2016 dollars. To give someone who makes $50k per year the same advice as someone who makes $500k per year, is about as lame as you can get. She can't see the bubble, because she IS the bubble. Her ilk are the Bernie Madoffs of this era. What people like Suze Orman and the entire Financial Services industry are doing is using fear to gain business. People are scared because now almost everyone is behind the curve on retirement EXCEPT overpaid financial talk show hosts. 

Mr. Money Moustache, unofficial leader of the FIRE (Financial Independence, Retire Early) movement took her to task for her comments with what I consider the best tips anyone can get on financial freedom under the new reality. As we move forward, this advice will become more and more important:

it is possible to blow almost any paycheck, simply by adding or upgrading more cars, houses, and vacations

But for most people who get there, Financial Independence does not mean the end of your working career

Instead it means “complete freedom to be the best, most powerful, energetic, happiest and most generous version of You that you can possibly be.”

The one thing he says that I 100% agree with is that it's FAR easier for someone who has a low income to achieve financial independence than someone who has a high income. For obvious reasons: people who have low incomes ALREADY know how to live frugally. They're already doing the things that high income people are just now learning. For them it's not a "new paradigm", it's a way of life.  

Here are my thoughts on retirement (at any age) under the new paradigm. Many of these I am sure are already well established under the "FIRE" movement. But I will add my own context.

First off, conventional retirement will never be possible now for the overwhelming number of people. Why? Because employers shirked their obligation to employees by switching from traditional pension plans to everyone-for-themselves IRA/401k/RRSP style plans. Which means that now EVERYONE is a gambler. A model that doesn't work, because people make very bad asset allocation decisions - with the assistance of corrupt financial advisors.

Worse yet, post-2008, zero percent interest rates rendered not only most self-directed plans insolvent, but also most traditional pension plans are now insolvent. There is a MASSIVE underfunded (public) pension liability in the U.S. and other countries now. 

All of which has pushed individual investors and traditional pension managers into taking far more risk than they should be taking. Add in the fact that the Financial Services Industry is run by sociopaths, and it's no surprise that now people are record long stocks at the end of the business cycle. Unfortunately, stocks are not priced based upon what someone paid for them yesterday, they are valued based upon their flow of earnings. And when earnings crater due to recession, stock prices follow. There is nothing anyone can do to prevent that from happening. Taking into consideration the fact that 10,000 Baby Boomers per day on average are reaching 65, and it's a recipe for demographic disaster.

Never before has so much been riding on a mega stock market bubble.  

So of course the Financial Services industry wants everyone to believe that all they need to do is save ludicrous amounts of money and invest it in passive ETFs in order to retire fat and happy. Unfortunately, all of the machinations of the past decade have made that totally impossible. The stock market no longer represents the long-term value of underlying companies. It now merely represents an algo-driven momentum Ponzi scheme. Which was just ginned with $1 trillion of tax cut hot money.  Corporate debt is at an all time high due to stock buybacks. What that means is that once debt covenants are breached - based upon free cash flow - the bondholders will own the company. At that point, many stock prices of well known companies will go to zero.

More and more people are rejecting (wage) slavery due to the fact that real wages, benefits, and socioeconomic mobility have been declining for decades. The hardest working people get paid the least. Historically, the unemployment rate was inversely correlated with labor participation (age 25-54) - higher labor participation equaled lower unemployment. Notice in 2008 they became positively correlated - because the official unemployment rate took the long-term unemployed out of the labor pool. The joke will be on them when the unemployment rate and labor participation rate both hit 0% at the same time. 

Here are my thoughts on "FIRE" based upon my lifestyle for the past two years since I lost my high paying Tech job:

First off, children are the largest liability and the largest impediment to financial independence. The U.S. birth rate collapsed after 2008 for logical reasons. This isn't advice to ditch the kids on the side of the road, it's merely to say that going forward, people need to be very smart about when, and if they have children. If a young person can barely look after themselves, why would they have kids? Think hard too about who you're marrying because if they don't share your new-paradigm views on the "value" of money, and they want to live in the Matrix, that is going to be a source of "agitation". 

Abandon the competitive lifestyle

Move someplace inexpensive

Share accommodation

Work part-time/Do gig work

Be creative and resourceful/DIY or trade favours

Live a healthy lifestyle

Avoid credit in any form

Ditch the car: Walk, take the bus, Uber, ride bike, hitch hike

Assume Social Security will be there at some level between 50-100% depending on your age

Stop defining yourself in terms of what you own. See your possessions for what they are - liabilities. 

Stop worrying. Be happy