Save half, invest in low cost index funds. You need 25x your income and can withdraw 4%/yr safely. It’s a plan. But life is more than a simple equation. If you’re married w children there is educational expense. If you stash money in IRA like accounts the government owns part, is taxed as ordinary income and the government forces you to spend the money in your old age. If you stash money in a Roth account you paid off your government debt early, but the account has its limits on investment amount so you have to save a long time to get any substantial amount. Taxable accounts are taxed with the purchase money and taxed yearly on the investment income and taxed again on its appreciation. Medical expense is a constant and there is an account for that. There are plenty of tricks and hacks and optimizations and “how you do it matters”. So what’s a mother to do?
I would define life in epochs. Each epoch has its purpose. Fore example you get married, that starts the “married epoch” and the need to fund a marriage. You have children, that starts an epoch of needing to fund children at least until they can fund themselves. You want to retire some day with more than a pittance of government subsidy that starts the retirement epoch. You start a business, that’s the business epoch. Epoch can and must run in parallel. Epochs have different sometimes well bounded time frames. For example college occurs over 4-6 years depending for each kid. It should be neither over funded nor underfunded. It should be neither over risked or under risked but properly risked, so the money is there when the time comes. Retirement has a different time frame since retirement lasts a lifetime, but the same kind of constraints apply. You need to properly fund it, properly risk it, and properly spend it. A business has it’s own epoch. You have to build it maintain it and eventually dispose of it. It has its costs and it may or may not fail. Healthcare and insurance cost has it’s own epochal consideration.
These epochs intertwine in a complex way. If you have a business or a wage you use that to fund your future. Once you’re finished working you use what you funded, the accounts associated with each epoch as the means to subsidize your future and your security. Save half, x25, 4% doesn’t do the complexity of the problem justice. It’s basically saying “something is better than nothing”. True enough but woefully incomplete in it’s analysis. You want a plan with a high probability of success. Enter the tools.
I found a website that allows goal planning called Goalscape It’s a tool to plan complex problems like financing life. It has a free version that allows up to 30 goals to be planned in hierarchies with variable percentages in the hierarchies and the screen has a drill down feature. So I whipped together a financial life life
This is kind of the 4% x 25 view of things. You spend most of your life working (31%), saving for college (6%) and saving for retirement (31%) , and a similar time (31% spending your portfolio. In this example the retirement portfolio accumulation and deflation are identical at 31%. Work and interest on investment fills both College which is 6% and. So 68% of your human capital is represented in work and saving, some for college and some for retirement. This is what “save half” means. You use 68% of your Human capital and expend 31% on living, 31% on purchasing a retirement portfolio and 6% on Juniors future. Jr goes to school and spends his 6%, you quit work and are left with 31% to survive in your dotage.
Now we are getting granular. We see “work” can mean W2, small business on the side and something you do to multiply your value called education. We see The Retirement Portfolio has multiple accounts and each account has it’s own feature/s disposition, tax treatment and percentage of funding. which must be elucidated for the plan to be effective. 4 x25 and stuff it all in a TIRA is nonsense when you actually think about this. We see the granularity of portfolio deflation start to emerge. It’s not that you spend 1/25th but actual needs are displayed and some idea of how much each need exists in a hierarchy of expend ability. You can skip splurges and jigger legacy so those categories become a sort of internal portfolio insurance if tings tend toward the sour. You can adjust the percentages because it helps you understand what and how long it takes to fund those percentages. This is the concept of UBER driver FIRE to regular FIRE to FAT FIRE displayed right before your eyes. College may also have components like scholarships and loans depending on income level at the time Jr goes to school. A buck saved from “college” is a buck toward retirement.
Even more granularity on what retirement means. You subdivide your needs and get a clear idea of what is bottom line and what is squishy. You’ve heard retirement is squishy? It mostly is not. It’s mostly concrete with a dab of squishy. It took 20 minutes to whip this up. It’s generic but a hell of a lot more informative regarding reality than 4 x25. It informs you what happens when you use a FV calculator to determine your future and the likelihood of success. It’s harder to delude yourself when you see 30 things need to be funded in retirement and each has it’s own inflation and risk etc.
Note: This is the free version and I used 27 categories. You can just plan, take screen shots (I use gadwin print screen capture tool, not the pro but the free one. Once you do the highest category you can make sub category hierarchies for example I would do a sub category on portfolio accounts to look at and optimize tax consequence vs funding and something about what I expect to do with the account in retirement. For example Roth in my portfolio is for insurance and legacy. As such it doesn’t need to be over funded or underfunded but correctly funded by Roth conversion. If it’s going to serve those purposes it need not be huge and it will grow unmolested to either be used in a disaster or to leave to the kids. If you fund it early it’s time to grow unmolested will magnify it’s value at the end. So if you fund a Roth for 6 years of residency and fellowship @ 6% return that’s $92K. You can get 6% in a 50/50 2 fund easy. In 40 years (say age 70) That $92K is now $1M and you are self insured going forward for long term care and medical disaster your cost for this self insurance? $66K.
Enough for now. I was playing with the Personal Capital program and between this tool and PC’s portfolio planner and some fooling around with the portfolio visualizer suite. I think you can give Buffet a run for his money when it comes to financial planning. You can certainly kick any Bogelheads ass every day of the week and twice on Sunday. I’ll write something on that soon.