Wednesday, January 9, 2019

Financial immortality not THAT difficult



You may laugh when you hear me predict that we are nearly immortal (in theory) because of my son’s observation that the progress in medical science is such that every year human life expectancy increases also by a year. In other words, unless you are hit by a truck, every year you live, your ‘expiry date (😊)’ is postponed by a year – so you’re, in theory, are immortal.

Well, we are making progress towards immortality or extended life expectancy as witnessed by the above headline. Now this is a thing, I have been advocating for years: do your financial planning as if you are immortal. Many planners (although that is changing these days) are planning your retirement to start at age 65 (or 55) and expect you to run out of money by the time you reach average life expectancy – typically age 83. So based on 80% of your current working life style and expenses, how much money do you need to do so?  My critique of this approach is: ‘Starting your 83th birthday are you then expected to live of the food you collect out of other people’s garbage?’

A ridiculous approach!  Much better to strive for being at any age: 30, 50, 80 years and have enough financial means not to be dependant on a career of employment, i.e. tell your boss to screw it and being able to live until the end of times.  Can you imagine Canada’s poor government having you to pay a state pension forever? Better to consider OAS and CPP as a bonus or back-up plan for when things go entirely out of control, short of the end of the world!

We aim to accumulate enough assets to generate cash-flow that is large enough  to pay your cost of living and… to undertake projects that you consider doing worthwhile – like starting a business or building a new residence or traveling around the world for the next 200 years or until you tire from those trips. That is not as difficult as it may seem. But you must live below your means and invest wisely during your not-being-your-own-boss-days. That way you can accumulate sufficient assets and hopefully even grow those assets to get wealthier and wealthier so that your ‘worth-while’ projects become ever more audacious. That is how we grow as human beings. I call this ‘being financially adult'.

How much is the minimum you need?  My rule of thumb is that one person can live comfortably in 2018 from $50,000 per year. Assume a return of typically 4% plus inflation (today around 2%) and you need 50,000/4% = 1,250,000 ($1.25 million) in assets.  I assume that you pay around $15,000 per year for housing whether renting or owning.  Of course, when you are 65 and collect $16,000 annually or so in Canada Pension then you will need $34,000 per year or $850,000.  Accumulating these assets over a life-time is far from impossible, especially when you live below your means.  In an earlier post on earning $50,000 tax free I showed how you can build a portfolio of dividend paying stocks worth $1,16 million. 

But you must realize that the day you achieve this financial adulthood, you should not run to your boss and shout “I Quit!”. Rather keep building more assets because you will need the means to do whatever you feel is worthwhile until the ends of time. Depending on your ambitions that may require another $200,000 up to an unlimited number of dollars. And trust me, chances are that you will likely get bored without these 'worthwhile projects' and just writing a blog on investing likely won’t do the trick!

On our way to an immortal and spectacular life!

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