“When Can I Retire?”
Guest Blog By Adam Zuercher
“When can I retire?”
Whether it’s in my conference room meeting with clients, or in a casual conversation with friends, this question seems to come up on a regular basis.
The thought of retirement sounds appealing to many people. I get it. You are looking forward to the day where you don’t have to answer to anyone. You imagine what life would be like if only you didn’t have to be tied to a schedule, and you could go to the beach, go golfing, or help a friend in a moment’s notice.
What you really want may not be a life of full retirement, but the financial resources to make work optional. You want to know that if things aren’t working out in your current job, you can take some time off to figure out what you want to do next. You want to know that if stress is taking a toll on your health you can find a job that’s a little less demanding and more flexible. You want to know that if you want to take a one-year sabbatical you can do so without it terrorizing their finances for the rest of your life.
So, what does it take to make work optional?
The next question is:
“How do I create wealth?”
What is wealth?
Before I show you how to create wealth let me define it for you.
Merriam-Webster defines “wealth” as an “abundance of valuable material possessions or resources” or having “abundant supply” of something.
Who wouldn’t want to have an abundance of financial resources or an abundant supply of money?
For many people, talking about the accumulation of financial assets and resources is uncomfortable or brings negative emotions with it. You may have grown up hearing that money is evil or you may believe that the “rich” have taken advantage of others to gain that status. If that sounds like you, I’d suggest that these are limiting beliefs that have been programmed into your thinking by the messages you’ve heard from others.
Money is just a tool. A tool that’s no different than your car, your lawnmower, or the hammer in your toolbox. Yes, money can be used for evil. But, it can also be used for good. Any tool is only as good as the motives behind the person using it.
Money can be used to buy time and more time equals more freedom for you. Time is the one resource that is limited. You have 24 hours in a day and 7 days a week.
Now that we’ve established that you are using your wealth for good, let’s get on to the principles of wealth creation. These principles are actually pretty simple, but not always easy.
8 Principles for Wealth Creation:
1) Invest in yourself.
Investing in yourself is the best and most important investment you will ever make. In your quest to create an abundant life always start with you. An investment in yourself will compound faster and reward you more than any other investment you could ever make.
You are your own greatest asset. So, how can you improve you? Focus on the following areas:
You need to be healthy to be wealthy. People who are healthy physically, spiritually, and mentally are likely to make more money. Furthermore, you’re more likely to be able to enjoy your wealth if you’re healthy. It seems that being healthy is a challenge in today’s culture of busyness. Focus on your habits and create daily rituals that will set you up for success.
Never stop learning.
The world is constantly changing and evolving. To get wealthy, don’t stop learning after graduating from school. The best part about learning after we get out of school is that we can focus on learning more about the things that interest us. No one is telling us what to study. Commit to a lifetime of learning. Pursue the things that interest you. Get curious about the way things work.
Leverage your Unique Ability.
Discover your strengths. Take assessments and personality profiles to learn more about yourself. Once you discover your strengths spend as much time as possible sharpening your skills in those areas. Look for ways to use your Unique Ability in all that you do. When part of a team, seek to understand others’ unique abilities too, so that together you can achieve more.
Establish Atomic Habits.
Habits are the foundation of your success. In his book, Atomic Habits, author James Clear points out that a 1% change doesn’t take much on a daily basis, but over time will compound to the point where you can achieve massive results. Here’s what James has to say:
“An atomic habit refers to a tiny change, a marginal gain, a 1 percent improvement. But atomic habits are not just any old habits, however small. They are little habits that are part of a larger system. Just as atoms are the building blocks of molecules, atomic habits are the building blocks of remarkable results.”
“Habits are the compound interest of self-improvement. Getting 1 percent better every day counts for a lot in the long-run….The same way that money multiplies through compound interest, the effects of your habits multiply as you repeat them.
“[Habits] seem to make little difference on any given day and yet the impact they deliver over months and years can be enormous. It is only when looking back two, five, or perhaps ten years later that the value of good habits and the cost of bad ones becomes strikingly apparent.”
Your future net worth will depend on the habits you establish today.
2) Create something.
The world rewards creators. When you boil it all down, there are really only two types of activities: 1) consuming things, or 2) creating things.
There’s nothing wrong with consuming, but it’s the creators who get rewarded.
If you want to create wealth you first have to create something special.
Go create something. Create value for your employer. Create a product, a business, a service, a blog, a podcast. Write a book. Start a YouTube channel.
When you contribute something to the world it will reward you. Not only that, but creativity compounds. As you create things you are proud of that people happily consume, it will inspire you to create more. Creating is fun!
3) Save half of your raises.
There is ONE simple thing you can do to build more wealth without sacrificing your current lifestyle. It doesn’t matter how much money you already have saved, or what your current income is. This strategy can take anyone from no wealth to significant wealth if applied consistently and without fail for 20 years.
Here’s how it works:
STEP 1 — Draw a line in the sand today. Make today’s income your “baseline”. Continue living as you are without sacrificing your current lifestyle.
STEP 2 — For every dollar you earn above the baseline from here on out you will: SAVE half of it and SPEND half of it.
By giving yourself permission to spend half of every raise, it also feels much easier to save. It’s a balanced approach to enjoying your life today and building wealth for the future.
Here’s a quick example. According to the Census Bureau the 2018 median U.S. household income was $63,179. To keep things simple let’s say your income was $65,000 in 2019. Let’s assume that since you are committed to investing in yourself regularly and creating things that have value your income will grow 10% a year. Here’s what saving half your raises would look like over the next decade:
By following The 50/50 Rule of Future Raises, the increases to your standard of living are much more controlled and your lifestyle expenses rise much more slowly. If you follow this rule, your savings rate (% of income saved) will grow every year while your spending rate (% of income spent) actually declines as your income grows!
This is how people retire early or make work optional while still enjoying a rising lifestyle! The only difference to your lifestyle is that the increases to your standard of living aren’t as big and fast. That’s not a bad trade-off for actually being able to retire someday within a reasonable timeframe, and with a stream of income that covers your standard of living.
A quick note to anyone still in school: Imagine you are just starting your career, and you just landed your first job out of school. If you are able to save 50% of your income you will give yourself a very quick on-ramp to financial freedom. If there’s one thing I wish I would have done differently early in my career it’s save more money!
4) Invest in the stock market.
Take a look at the Forbes list of richest people in the world. Do you see a common thread? Most of these billionaires have created their wealth through a business they started. Or, in the case of Warren Buffet (and others) by investing in great businesses. What’s the takeaway? The two most common ways of creating wealth are to:
- start a business with a unique product or service (be an entrepreneur), or
- invest in great businesses (be an investor).
Anybody who wants to be an entrepreneur should certainly give it a shot. However, being an entrepreneur isn’t for everybody. The far simpler approach to building wealth is to be an investor.
The stock market makes it possible for anyone to be an investor. There are plenty of great businesses that are publicly traded giving you an opportunity to build wealth using the same methods as the world’s richest billionaires.
Here are some tips when thinking about which stocks to own:
- Invest in financially strong businesses. Learn how to read financial statements. You want to own profitable companies that are growing their earnings.
- Stay in your circle of competence. You want to own companies that have products, services, and business models that you understand. You should be able to explain their business to a sixth grader.
- Look for companies that have a competitive advantage. This could be a unique product or service, large market share, or a powerful brand.
- Include companies that pay dividends and increase them regularly. Dividends are a distribution of profits to shareholders. Dividends prove that earnings are real. Dividend income also helps cushion downside market volatility.
- Invest in companies that are participating in large economic trends or themes. (See Principle #6)
5) Embrace the right risks.
All investing has some form of risk. You’ve likely heard before that without some risk there is no reward. As the saying goes, “No pain. No gain!”
Learn as much as you can about the different types of risk when investing. Although there are many other risks, there are two competing risks you must understand: Inflation Risk & Volatility Risk.
Inflation is the reality that the cost of almost everything increases over time which means that the purchasing power of your money is also decreasing over time. So, if you want your wealth to grow in a way that you can maintain our standard of living (purchasing power) you must invest in a way that exceeds the rate of inflation.
Volatility is the measure of variance of returns from the average. In most cases, the riskier an investment, the higher the volatility. So, stocks, which I’m advocating you own to build wealth, have much more volatility than cash or bonds, which are not as likely to produce returns that exceed inflation.
People will tell you that stocks are risky. Yes, that’s true. But, the real risk is losing purchasing power with your money. Also, keep in mind that the longer your time horizon, the less likely it is to lose money with a well-diversified portfolio of stocks.
6) Study the future.
Watch trends, learn about new technologies, and make some bets on new innovations that will change the world over the next 10 or 20 years.
Here are some examples from the past decade:
- Mobile Technology: Over the past decade anyone who embraced the power of mobile as an investor likely did well. Think about the companies that benefited the most. Companies like Apple (AAPL), Google (GOOGL), and Qualcomm (QCOM). Take a look at their stock charts to see that the market rewards innovation.
- Software as a Service (SaaS): Years ago software companies made money by selling their software for a one-time licensing fee. Anytime they released major upgrades or new versions they would have to convince people to upgrade and they would charge an upgrade fee. Over the past decade software companies that have transitioned their licensing structure to ongoing subscription models have flourished. Recurring revenues from software subscriptions are a great business model with more predictable cash flows and “stickier’ customers. Two great examples of companies who’ve successfully made this transition are Microsoft (MSFT) and Adobe (ADBE).
- Cashless Payments: Fewer people use cash than ever before. Mobile technology and the internet have enabled much more convenient ways to pay for stuff. Anyone who recognized this trend over the past decade did very well investing in companies like Mastercard (MA), Visa (V), and Paypal (PYPL).
Areas to focus thinking on in the next decade or two:
- More SaaS: Software is eating the world, and as mentioned above SaaS companies have great business models.
- Everything as a service (EaaS): Cloud computing subscriptions are evolving beyond software to include communication, infrastructure, data and platforms.
- Subscriptions and Memberships: These are the new business model. Recurring revenue is king for business. This business model works for nearly anything including software, food, cars, clothes, media, and phone upgrade programs.
- Cars and Trucks: Nearly every auto manufacturer is working on electrifying their cars. In addition to electric vehicles the future of transportation is autonomous (or driverless) vehicles. Leading the way is Tesla, but all of the other major auto manufacturers are working on similar projects. There will be huge economic implications. What will this do to energy companies? How about the insurance business? Will driverless Uber and Lyft cars replace taxis? What companies stand to benefit the most? What companies will become obsolete?
- Artificial Intelligence (AI): Computers and machines have the ability to think and learn. Surely there will be some big opportunities to invest in the companies who are leveraging AI.
- Healthcare: People are living longer than ever before thanks to breakthroughs in technology and healthcare. Companies with the mission of improving our quality of life stand to benefit the most. Look for companies that are making age 100 the new age 65. Nobody wants to live forever unless their quality of life remains strong.
- Blockchain & Cryptocurrencies: Blockchain is the underlying technology for currencies like Bitcoin. It’s early, but blockchain has the same transformative power that the internet has had. Those who understand this technology and it’s uses will have an opportunity to invest early. Will cryptocurrencies replace fiat money? Time will tell. It would pay to study the cryptocurrency philosophy by reading Satoshi’s Bitcoin white paper.
The future is changing faster than you think. The biggest opportunities for stock market investors will be in the companies that are in the thick of all the major changes ahead. There are unlimited ways to learn more about how the world is changing. My favorite resource is the work of Peter Diamandis. Start with his podcast and then check out his book, The Future Is Faster Than You Think.
7) Be patient.
There is no such thing as an overnight success for most people. Some get very lucky and end up at the right place at the right time (first in at a startup). Some hit a home run or several with their investments. For most people it will take a minimum of 10 years to begin to see the exponential results that come with the power of compounding. Give it 20 years to see the massive results you really want. Not just financial compounding, but also the compounding you will see by consistently investing in yourself and focusing on getting 1% better every single day.
Honestly, I hate the word patience. I’m not naturally a very patient person. I like words like FAST and QUICK, but when it comes to building wealth it happens much slower than you’d like.
The hardest part of building wealth is the patience required during the first 10 years. The first decade is the hardest because it takes time for compounding to do its thing. Stay focused on the trajectory. As long as you consistently have tiny gains in your self improvement and your net worth you can have confidence that the future will pay off.
8) Manage your emotions.
The biggest threat to your wealth will be your own emotions. In the pursuit of wealth people are known to make some very poor decisions. These decisions are typically driven by one of two emotions: fear or greed.
This emotion is most common in down markets. When the market is down 30% you aren’t going to feel so good about your investing. In fact, fear will start dominating your thoughts. The fear of losing all your money is quite powerful. If you have a well thought out and disciplined investing strategy losing all your money is also quite unrealistic.
This emotion is most common when the stock market is really hot. It’s also common when a certain stock or investment has a very fast and big surge in price (think Bitcoin or more recently Tesla). The interesting part is that greed is often also driven by fear, or FOMO. That is the Fear of Missing Out. People are vulnerable to greed when they hear stories about their friends making more money than they are. They want in on the action too!
Sketch by Carl Richards
Long-term, real life financial outcomes aren’t only driven by investment performance, but also investor behavior. Learn how to manage your emotions so you don’t make the big mistake of selling when fearful or buying when greedy. Many investors have failed trying to manage their emotions on their own. You will increase your odds of success by having empathetic, but tough-loving, behavioral guidance from a financial advisor.
The trajectory of your journey will not always be up and to the right. You will have obstacles and setbacks along the way. You will endure economic recessions, stock market corrections, and bear markets. The key is to focus on progress, gratitude for what you already have, appreciation for the people and relationships that are part of your life’s journey, and fulfillment from your life’s work.
Don’t make the mistake of thinking that wealth is a destination. Becoming wealthy is a journey. Enjoy the process, and you will enjoy retirement.