arithmetic

If I Had a Million Dollars…
photo shows a road through a wooded area with "RETIREMENT" painted in yellow on the pavement

It’s a premise we’ve heard in songs and any number of written works. “If I had a million dollars…” It’s a great prompt—sometimes serious, sometimes humorous. I’ve decided to take a crack at my own entry into the million-dollar discussion!

I had the privilege recently of meeting a young person who shared their goal of retiring at age 30. I was struck by the ambition, shared by many in the FIRE movement: its mantra is “Financial Independence, Retire Early.” So here I am thinking about a million dollars. What I have to say is all about the numbers. Money and numbers are how we fund the life in which we act out our values, plans, and dreams.

Wondering what it takes to retire early? It’s not a universal formula, but we can take the idea of accumulating a million dollars of invested capital as a decent proxy. In this scenario, one has to be able to imagine someday living on, say, a $50,000 a year. But it also requires a willingness to endure the ups and downs of ownership. They are just part of any long ride in the markets. (And keep in mind it would take a far bigger number to retire on today’s low interest rates on stable forms of money!)

Two factors really affect the path to retirement. One is how we spend and earn along the way; the other is inflation.

First, because financial independence is all about our resources exceeding our needs—income exceeding outflow—reducing your needs is one way to get there sooner. The other side of the coin is finding ways to maximize your human capital in these working years, getting paid more for your labor. So the first best investment might be in yourself to improve your earning power. Fewer expenses, more income—more money to invest for retirement.

Second, inflation will affect how the path to retirement unfolds. Inflation risk is the extent to which our money loses purchasing power over time, so we have to take that into account as we plan for our future spending in retirement.

So let’s get back to the numbers. How much money would we need to invest each year in order to have $50,000 (in today’s dollars) as annual income in the future?

Let’s assume 3% inflation and 9% investment returns—neither of which is guaranteed—and 5% annual withdrawals in retirement. Starting from zero, we could be…

  • retiring in 7 years by investing $129,782 annually ($10,815 monthly)
  • retiring in 15 years by investing $51,529 annually ($4,294 monthly)
  • retiring in 25 years by investing $23,999 annually ($2,000 monthly)
  • retiring in 35 years by investing $14,349 annually ($1,196 monthly)
  • retiring In 45 years by investing $6,982 annually ($582 monthly)

These numbers are just one way to slice it. If you could live in retirement on $25,000 of today’s dollars a year, for example, take those amounts above and cut them in half. If you would want $100,000 a year, then double the figures.

We don’t know the future, and these calculations are not the future. But it’s a place to start toward a plan.

Clients, if you want to sort out your situation—or help a younger person get started—email us or call.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

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Play the audio version of this post below:

If I Had a Million Dollars… – 228Main.com Presents: The Best of Leibman Financial Services

This text is available at https://www.228Main.com/.

Joining a New Club: Some Thoughts about Social Security

Claiming Social Security benefits is often talked about in formulas, as if it’s always straightforward. Nonmathematical factors—and feelings—should be given their due weight, it turns out. More in this week’s chat.

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DIY, DIFM, or In-Between
photo shows a picture of a desktop with wooden letters saying "DIY," scissors, block, beads, and other craft supplies

In many industries, people distinguish between DIY and DIFM: “do-it-yourself” versus “do-it-for-me.” The same is true of investing and financial planning.

Whether you are trying to build a deck or a retirement portfolio, the internet is full of pertinent information to help you on your way. You may not be a carpenter, but you may have the tools and skills to build a deck. Add some information, time, and motivation, perhaps that new deck will appear in your backyard through your own efforts.

A successful DIYer has all of those things. It does not always work out, but when it does, someone has used their own skills and efforts to do something many others pay for.

When the do-it-for-me or DIFM route works out, people trade money for the time and abilities of professionals in order to get what they want and need. I’ve mentioned before that I mow my lawn with a checkbook—a textbook case of DIFM.

When it comes to plans and financial planning, we believe that is either a DIY thing—you are the expert on your plans and planning—or a collaborative process of discovery. We may support your efforts, help you define or refine what you’re trying to do, maybe do some arithmetic, but you are still the expert.

On the investment front, though, we operate on a DIFM basis. We strive to grow the buckets: we research investments and manage portfolios for those who do not want to go the do-it-yourself route. DIYers have plenty of resources available other places; we’re busy trying to grow the buckets for those who say “do it for me.”

(Of course, our perspectives on everything from planning to investing are available online 24/7 to anyone with an interest in reading our blogs, listening to the podcasts, or watching the videos. There are some DIYers who check in regularly there. But our one-to-one efforts all go to investment services on a DIFM basis.)

Anybody could be a DIYer, in any number of areas… but it doesn’t mean you have to DIY. Clients, if you would like to talk about this or anything else, please email us or call.

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Play the audio version of this post below:

DIY, DIFM, or In-Between? – 228Main.com Presents: The Best of Leibman Financial Services

This text is available at https://www.228Main.com/.

Everything’s Connected, Chapter 137

© Can Stock Photo / punpleng

The world is both numbers and ideas, math and language, money and art, computers and nature. A lot goes into connecting your money to your life and ambitions. We were reminded of this in learning about the life and work of Ada Lovelace.

The world’s first computer programmer was not working out of a garage in California in the 1970s—but like the computing pioneers of Silicon Valley, the 19th century thinker Ada Lovelace saw possibility where others didn’t.

Born in London, Lovelace’s education started at age four. She was a young adult when she began work with other early computing minds on an analytical computing machine: a giant engine that could process numbers mechanically.

Although their genius wasn’t recognized at the time, Lovelace’s notes about this machine have helped lift her from history: she was one of the first people to suggest that if a machine could process numbers, it could process other forms of information, like text and images and other symbols.

The insight that resonates with us is, math is “the language through which alone we can adequately express the great facts of the natural world.” Certainly arithmetic is key to working out the money ends of your goals.

We owe a lot to Ada Lovelace, her contemporaries, and succeeding generations of pioneers of the modern age. We are all beneficiaries of their breakthroughs, and wiser for understanding the philosophy behind their achievements.

Clients, if you would like to discuss this or anything else, please email us or call.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

  1. Ben Rabinovich, “Ada Lovelace Day 2018: When is it and who was Ada Lovelace?” The Daily Mail: https://www.dailymail.co.uk/sciencetech/article-6256519/Ada-Lovelace-Day-2018-Ada-Lovelace.html
  1. Julia Markus, Lady Byron and Her Daughters: https://books.google.com/books?id=nOtwBgAAQBAJ&lpg=PP1&dq=ada%20lovelace%20education%20insanity&pg=PT131#v=onepage&q=translation&f=false.

 

Is a Drop a Loss?

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We humans use stories about events great and small to help understand the world. One of the common stories about the stock market contributes to a great misunderstanding, however.

A market decline from some higher point in the past is often spoken of as a loss. Yet whenever the market is trading at an all-time high, every past downturn has been fully recovered. One might ask where the loss actually is.

To illustrate, the decade of the 1990’s was a good one for the broad stock market, as measured by the S&P 500 Stock Index. It more than tripled, rising from 353 points to 1,469. Yet of the 2,527 trading days of the decade, 1,171 saw a decline—a drop—in the market index.1

Those down days represent a cumulative 729% in “losses.”1

In a decade when the market tripled, how does it make sense to speak of losses during the interim? Particularly losses equal to many times the beginning level?

The market is volatile. Values fluctuate. It goes up and down. But if you have long term goals, it might pay to focus on long term results, not temporary downturns. If you invest next week’s grocery money in the stock market, then yes, a temporary downturn will result in a loss when you sell out in order to buy food. Otherwise, we would say a drop is not a loss.

Note: one should never invest next week’s grocery money in the stock market.

Our business is striving for long term results for people who share our time horizon and philosophy of investing. We talk about it every way we know how, in many venues, to reinforce effective investing attitudes and to forewarn those who lack them.

Clients, if you would like to talk about this or anything else, please email us or call.

1Standard & Poor’s 500 Index, S&P Dow Jones Indices. Retrieved September 18th, 2018.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk including loss of principal.

 

The Monster Under the Bed

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When we were small, some of us had older brothers who tried to convince us there was a monster under the bed. You may be surprised to know there is a corollary in the world of investing.

The monster promoted by some is generally called “the arithmetic of losses.” The arithmetic of losses is a simple mathematical observation that from a given number, if you take a certain percentage decrease, and then an equal percentage increase, you wind up lower than you started–even though your increase and decrease were proportionately the same. For example, if you start with $100, and lose 20%, you are at $80. If you gain 20% of $80, you’re still only back to $96. But we are here to tell you, there is no monster under the bed.

Consider that when a major stock market index declines by 50%, it then does need a 100% gain to get back to even. This is just arithmetic. But consider: whenever a stock market index is at an all time high, that is conclusive proof that the “arithmetic of losses” is a bunch of baloney.

Each all-time high means that the index has successfully come back 100% from every 50% loss, 50% for every 33% loss, 25% for every 20% loss… and MORE. Every time, every loss thus far. The long-term history of major United States stock market averages speaks for itself, and incorporates all the losses and all the gains.

Some fearmongers say investors cannot live with the ups and downs that are a necessary and integral part of long term investing. Clients, you know we work hard to ascertain whether you could be suited to our philosophy.

Part of that philosophy is that temporary declines, no matter how sharp, are not losses unless you sell out. It is not always easy, but it has worked out. No guarantees about the future, of course.

If you can be turned into a chicken, then some operator who claims to ‘control risk’ or promises short-term stability AND long-term returns may get your money. Please keep in mind that every chicken, sooner or later, gets eaten.

The fearmongers are right about one thing: markets go up and down. You and we know this. We work hard to manage the money you need without having to sell out at a bad time. This is one of the keys to being able to get through the downturns.

Clients, we are striving to find bargains, avoid stampedes, and own the orchard for the fruit crop. These principles will not prevent volatility. But there is no monster under the bed. Email us or call if you would like to discuss this or anything else at greater length.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.