I am going to kick off today’s post with a couple of personal finance confessions.
First of all, I have no idea what my FIRE number is. That’s right, zero clue.
Now, to be very clear, I do have a range.
There’s a “base case” number – let’s just say it’s somewhere between $1m and $10m.
And then there’s the “stretch” target. This one is in double digits.
It’s a heck of a spread – but that’s okay. Because the second revelation of the day is that I have no idea when I am going to retire.
I mean, how could I if I don’t even know what my FIRE number is?
And so, somewhat unusually for a personal finance blog, you will find very few posts on early retirement here, other than my reflections on how it terrifies me.
Instead, I spend the vast majority of my time writing about the various ways to build wealth, as well as some reflections on designing an enjoyable life.
Some of it is down to personal preference. As it happens, I quite like the process of making money (amongst other things).
But the bigger issue is that I am always dumbfounded when I go on Twitter or another personal finance blog and see statements like:
“I am 27 and I will retire at 43 with a $1.75m portfolio”
The Great Unknown
Here’s the thing, I don’t consider planning to be a useless exercise. Far from it.
You definitely want to have a good grasp on how much money you are making, how much of it you are spending, and where the rest of it is going (hopefully mostly towards investments and not those friendly ladies hanging around Novikov on a Friday night).
However, anything beyond that is a total punt – because your savings rate is the only thing you have control over.
When it comes to investment returns, we are all just guessing.
Sure, those guesses are rooted in history and math. Over the last 100 years, the S&P 500 has generated an extremely nice annualized return:
And so, looking at charts like the one above can be highly reassuring.
That being said, statistics is a funny science. I mean, your neighbour may be the one having two girls over on a Saturday night – but statistically speaking, you are also getting some action.
Similarly, returns do average out over time – but no one invests with a 100-year horizon in mind.
A person who started investing in 1928 or 1999 would have a drastically different experience from the one riding the incredible bull markets of the 1980s or 2010s.
Same stock market. Same strategy.
Wildly different outcomes.
Let’s suspend our disbelief for a moment and assume that by some act of clairvoyance, we are able to say with confidence that future returns will average precisely 8.371834% per year.
Do you think that solves your problem? Tough luck.
Sure, you can calibrate your investments in a way that will leave you with exactly $1.75m by the time you hit 43.
But how will you know what that $1.75m will actually buy you in 16 years’ time?
First of all, there’s inflation. It could be 2% – or 5%.
For all we know, inflation could actually get ahead of the stock market for a while, leaving you with a negative return in real terms. What do you do then?
Or you could end up with a massive cognitive dissonance where the “official” inflation is 3% but your experienced inflation is four times as much.
I mean, have you tried buying a used car recently – or sending your kids to a private school?
Finally, there’s the question of your actual spending patterns over time.
I have an extremely good grasp of how much I’ll spend next year – or the year after that. But in 16 years? You’ve got to be kidding me.
Thing is, life happens – and it doesn’t care about that nifty spreadsheet you typed up.
Kids, aging parents, emergencies and windfalls, medical problems – there’s an infinite list of curveballs life can and will throw at you. And when they do come, finances are the last thing on your mind.
Sure, you can spend as much time as you like refining your return, inflation, and spending projections.
If you are really good (or lucky), you might even be able to come up with a semi-accurate forecast.
But as ever, the biggest problems lie outside the spreadsheet.
Goals vs. Systems
Scott Adams, the creator of Dilbert, has a wonderful book called “How To Fail At Almost Everything And Still Win Big”.
In it, he spends quite a bit of time describing the difference between goals and systems.
Remember that statement I opened today’s post with?
“I am 27 and I will retire at 43 with a $1.75m portfolio”
What you see above is a goal. It’s an admirable goal, but it’s still a goal.
I will retire at 43. I will have a $1.75m portfolio.
A system is totally different. It could be:
“I will save 25% of my income – and 50% of all future raises”
“I will invest 100% of my savings in low-cost, globally diversified index funds”
You see, the way Scott sees it (and I agree with him) is that goal-oriented people live in a continuous state of failure.
Most of the time, it’s what he calls “pre-success failure” – because they haven’t accomplished their goal yet.
But very often, that failure becomes a permanent failure – because their goal never works out.
You either don’t hit the mark, or you hit it too late, or you give up altogether.
Either way you cut it, it’s failure all around. It feels like a fight, causes stress, and makes folks feel like they want to give up.
This is especially true for people who take their goals seriously – like most readers of this blog.
Systems-oriented people, on the other hand, live in a perpetual state of success.
They succeed every time they save 25% of their income. They succeed every time they log on to Vanguard to buy those index funds.
And because they feel successful, they feel motivated and empowered to continue with their system.
Success begets success.
The other advantage of orienting your life around systems is that you are not pigeon-holing yourself by sticking to a goal you may have set many years ago, under very different circumstances.
Systems, by default, are flexible. Goals aren’t.
And so, a well-designed system provides enough flexibility to stop viewing life decisions through a financial prism – and to reflect the natural progression of life.
Perhaps you wake up one day and realize you want to start a business. Or write a book. Or simply take some time off to be with your kids.
In a goal-driven world, saying yes to any of the above implicitly means you are likely to fail at your goal of “retiring at 43”.
After all, that spreadsheet you built up didn’t account for a drastic reduction in income – with a non-existent (or a highly uncertain) offset.
Not so when you build your life around systems.
You can still continue saving 25% of your income and putting all the money into index funds.
Sure, you’ll contribute a far lower amount. But you will also end up living the life that’s right for you today, not ten years ago.
As it happens, I am coming in pretty close to my “base case” number.
That being said, I’m still far away from the “stretch” target. Unsurprisingly, the fastest way to get there is to continue doing exactly what I’ve been doing so far – maximizing my income and investing in real estate and equities.
But the thing is, getting there ASAP is not my goal. I am okay if I reach it when I’m 45. I will also be perfectly content if I get there at 60.
And if I never get there, courtesy of a nasty market correction, a nuclear war, or a terminal illness – that’s also okay.
Because while my system calls for maximizing my income, it doesn’t come at the expense of looking after my health, spending time with my children, and finding time for things I find enjoyable (i.e. this blog). Which, of course, leaves me with plenty of leeway as I think about the next episode.
In other words, there’s absolutely nothing wrong with setting goals and working towards them.
But as it happens, putting the right systems in place can take you even further ahead – all while making the journey far more enjoyable.
As always, thank you for reading.