The Hidden Face of Leverage: How to go Broke in the 21st Century

I’m reading a book about middle class failure.  It’s called NOMADLAND Surviving America in the 21st Century.  I’ve searched for FI blog posts about FI failure but find none.  FI is all about travel and travel hacking and minimalism, simple ratios proclaiming assured retirement longevity.  It’s all about starting a blog or some other side gig like real estate.  You know some white collar kinda of “passive income” kind of deal to make you a cool hundred K/yr on the side while jetting to media events.  It’s all about being glamorous and being amazing.  In short it’s all about a narrative that doesn’t include failure.  It’s preached with the fervor of a health and wealth evangelist.  It turns out MMM may not be the first evangelist of minimalism, though he may be the most prominent in FIRE land.  Here is a site CheapRVLiving,   dating back to 1995 this guy spent his life living in a truck and blogging about it.  Pretty minimal.

As I read the book it was full of stories people middle to upper middle class, college teachers, college administrators, accountants, home owners, 401K owners, people with several hundred K in the bank and retirement accounts some pushing a million.  The people are now Workampers, itinerant post 65 year old’s who travel from “gig to gig” like Amazon fulfillment centers.  They walk 15 miles in 90 degree heat a day stooping and lifting to fill pallets with goods to ship to us Prime customers.  They pick sugar beets, and scoop ashes and clean toilets 4 times a day at California campsites and make ten bucks an hour, trying to survive.  10 bux an hour plus a place to park their truck.  Some campsites don’t have showers.  Those are half an hour away.   They get paid for 8 but are expected to do what it takes.  If that’s a 12 hour day so be it.  People lost their dough in 2008.  People got divorced and the savings were split.  Mortgages were due and jobless could no longer make the nut, people just walked away unable to pay.  (I’m 66 and retired).  They drive from place to place, no healthcare, a few bucks for gas, maybe a burrito from Taco Bell living in Vans and Trucks and RV’s.  Entirely different narrative than the FIRE narrative.  It turns out these employers like the seniors because they know how to get the job done.  They are wired to do the task at hand even if their bodies are busted and injured and fried.  They like the seniors because come hell or high water they show up.

It’s a fascinating contrast and so I ask myself what’s the difference?  How can high level executive types wind up shoveling shit in a camp ground instead of swilling stout with MMM at some event?  As I worked through it I think it’s leverage.  People live lives of leverage and they don’t even understand they are levered up.  I wrote an article: “A Graphical View of Retirement”,  and I was struck that the difference in the three scenarios was leverage.  The 60 year old basically had no leverage and could pay for his retirement straight up cash on the barrel head.  He would get some SS likely but he wouldn’t struggle.  He saved for 40 years to cover 30 years.  In the 52 year old’s case his future was slightly leveraged.  He worked only 32 years to cover 38 years.  He was basically bullet proof as well.  He only needed to make a net of 15% on his money over 38 years to compound his money to enough to cover his retirement.  SS would make up most if not all of his shortfall.  The FIRE guy had to cover 52 years, but he only worked 18.  In his retirement he needed his retirement nest egg to triple to die not poor.  Each of these guys has a different level of leverage on the future from 0 to a lot, and each will have a different probability of joining Workampers R Us.  In 2008 people who were slated with retirement aspirations 20 years in the future, were forced to crack the nest egg in the present with no W2 assist on the horizon.  Remember as you withdraw from the nest egg it’s ability to pay you contracts and chances of failure increase.  Their expected age 60 portfolio turns into the age 38 portfolio in a crash and is way underfunded.  People worry about poor return, but this hidden unrealized leverage is just as deadly.  FIRE types talk bravely and glibly about withstanding disaster and how FI gives you “options”, with no experience of failure.  Then comes Hurricane Mike.

It’s about as close as I’ve yet come to failure stories

6 Replies to “The Hidden Face of Leverage: How to go Broke in the 21st Century”

  1. I don’t really understand this FIRE. I took plenty of time off but never broadcasted it while I was doing it. Taking some time off was a personal choice. It is NOT a life goal post. My husband was not off pursuing a surgical residency while I had two little babies at home. I was the stay at home wife while working 7 days a week. Something was gonna break. If I had a stay at home wife- sorry dudes, but I’d probably be working fulll time. That’s how it looked from my side of the fence.

    Anyhoo, enough about the past. I am still working through this process of deflation as you say. I think my journey into this is only just beginning.

    And by the way, I absolutely have known about early retiree failures. We knew a number of those during the dot com and the 2008 crashes. Just none of them started blogs that’s all. They just quietly went back to work.

    My old partner in practice said he would “retire” in 2000. He is still in practice since he now refers to my husband. Life happens folks, like all the time.

  2. Hey MB! FIRE is like buying a mortgage on a house except the house is actually a “retirement portfolio” In the house case you and the bank own the house. You pay more for the house than it’s worth in interest. You’re $300K house actually costs you $450K. It’s advantage is you get to live there. If you mess up you’re homeless and you get to go live in your car.

    When you buy a retirement portfolio you are doing the same thing. You and your future own the property. You pay down the mortgage and your principal increases. Fortunately your future has a vested interest in seeing you survive so he is going to give you all the interest he collects once you retire to extend your financial longevity. Then when you retire, it becomes a race to see who dies first, you or your portfolio.

    Lets say you live 90 years. You grow up for 20 and work for 40 and you feed the portfolio for each of those. Your future has acquired 40 years of interest and you have your principal. You retire and you only need to cover 30 years. Your risk is essentially zero. You can have a hamburger every day till you die and pay for it yourself free and clear. Mr future gives up all his interest and retires with you.

    Scene 2: You start at 20, and work for 30 years. This means you have 40 years to cover. If you do a future value calculation, and you save $5500 for 40 years @ 6% it grows to $900K. The man above retire therefore with say 900K. This is why he is golden. $5500 per year @6% for 30 years is only $450K and Mr 450K has 10 more years to cover. Lookin’ a lot more dicey. Your bet at an age 50 retirement is you can risk the 450K to grow at a rate sufficient to get you over the finish line. Now it becomes a game of ratios but since 30 years wealth is at least 3/4 of 40 years Mr future will have to continue to work until you die to make up the difference. He’s happy to do that but then one day a bandit comes and shoots him in the head and your source of hamburgers is dead. If your’re pretty close to being dead yourself you can economize and reach the goal.

    Scene 3: RE Some joker gets a job. He makes a lot of money and starts saving. He reads about a scheme where you pick a number out of thin air and run it backward through a future value calculator and come up with “your number”. He reaches “your number” in 15 years. So if he started at 20 he reaches “your number” at 35. Since he believes the narrative he retires. He has 55 years to cover. Hs projected actual cost of retirement is 4 times more than “your number” because he has such a long time to cover. His bet is he can squeeze 3 more times the interest out of “your number”, than he presently has. Hope to God Mr Future can perform miracles. If Mr Future craps out at 35 years in (his age 70) this sucker is broke. It’s not fun being broke at age 70 because often you really are broke with disease and such and you’re a french fry with no more omph. Each of these represents a different leverage and a different risk and a different likelihood of success.

    The thing you possess as the portfolio owner is the choice. Monte Carlo will tell you quite accurately the likelihood of success.

    Thanks for stoppin by

  3. The bone to pick seems to be excessive leverage and overestimated risk tolerance, rather than that the concept of FIRE is an inherent pipe dream.

    PoF, with his number being 33x (and growing, thanks to his site) seems to have a more conservative approach to the depletion stage with a greater buffer to grow. He has pondered the math in multiple ways from multiple perspectives, and concluded 24x is not a number he is comfortable with. Totally reasonable, and since docs on the whole tend to run conservative in risk tolerance, not all that surprising.

    I have less of an issue with MMM, since he and his followers are not necessarily advocating no income-generating work whatsoever for those final 30-50 years, just work that is not exclusively about maximizing the income. Perhaps they take lower-paying jobs for the health care benefits, or passion jobs that pay the bills while the retirement nest egg grows. 2008 happens, they keep the passion job a few more years, because flexibility is a component of the plan. Many roads to Dublin.

    Risk management as performed by a 20 year old will never be as informed as risk management performed by a 40, 50 or 60 year old simply because the former cannot by definition apply what we’d consider sufficient life experience.

    But there’s a slippery slope between acknowledging this inherent shortcoming, and taking a Mr. Wilson shaking his fist at Dennis the Menace stance of, “You kids get off my lawn!”

    They are not all dumb kids. There is a certain bravery to what they are trying to accomplish. And their understanding of the math may not be perfect – admittedly a significant risk to their financial health – but I’d be cautious in dismissing the movement as a vacuous and ill-conceived fad.

    Suze Orman to me was a lot of fist-shaking. She has legitimate reasons for doing so, as you point out, but they are not always internally consistent and her intolerance seems designed more to alienate and ridicule than inform.

    Gasem, you are one of the sharpest minds I’ve seen helping others sort out poorly articulated goals by bringing the realities of risk into focus. But I think of this the way I think of speaking to my kids at home. There are certain truths, which when delivered in my preferred mode, will be automatically shut out and met with eye-rolling. I’d rather my daughter hear the message than shut it out because I couldn’t find a way to be useful messenger.

    Keep on being that useful messenger, my friend. Many of us are counting on you as our Socratic gadfly.



    1. How many letters do you have of failed retirements? Suze claims thousands, which means her wisdom is seasoned. Regarding MMM his need for a job is 100% necessary because his margin of error is so low and his length of need is so long. If you look at the Monte Carlo data you see it takes 20, 30, or 40 years for your mistake to become apparent, if you made a wrong move. The reason you can make a wrong move at say 75 is because you’ll be dead before the consequence hits. I’ve been familiar with the retirement portfolio of several relatives because my Dad wound up as executor. In one case there was about $15K left in the accounts at RIP and the property was essentially worthless. Almost a death where the undertaker was stiffed. Had this relative required a nursing home… The other had 60K left and nearly that much in repairs on the property prior before sale. Another case of “what if” nursing home. Instead she infarcted and blew out her LV. #1 was 90, #2 was 88. Both had retired in relative luxury but cost outpaced projection. One’s husband was a real estate owner and businessman, the other was executive VP of a major industrial concern. Both incredibly business savvy husbands had died and the widows were left to fend for themselves for 20 years. The bogglehead approach is a study in automatic risk management, which is why bogglehead works. As long as you’re stuffing money in your chances of successful accumulation are excellent. I think deflation is more dicey. Let’s say you retire to a 55+ community, own your home and have relatively fixed association expense. 20 years later all the originals have croaked except a few nearing the end of their “PROJECTION” The old places from the croakee’s are bought up by a bunch of 30 and 40 somethings with kids and the new owners want the community to start building amenities paid for by association fees. The fees quadruple. You planned for a 1.5 times increase. You’re 85, complete this paragraph. I’ve seen this happen plenty living in FL. You don’t need a messenger you merely have to look in your family histories and do the analysis to know which way the wind blows.

  4. Another fantastic post!

    I personally like the 4% rule of thumb. It gives people a target to hit. That being said, I agree risk is something missing from the discussion. There are risk landmines all over the place that need to be discovered.

    Personally, I combat these risks in several ways:

    (1) I have redefined FIRE as Financial Independence / Recreational Employment. I don’t ever plan to stop working. At 32, I realize a risk is I change my mind, but the way I’m wired o think that is a low probability event.

    (2) To protect myself (and wife) from the above, we are targeting a net worth figure that will produce enough annual income from dividends, interest, and rents that should cover our expenses by 3X.

    Therefore, we are building no leverage into our financial plan. And we will never be to draw down the portfolio. In reality, we will not only continue compounding, but we will also keep adding to the bucket with the excess funds.

    We will have our house paid off in another nine months and will have achieved 11% of our $10M net worth goal (I think webcam hit this by 48). All we are looking for is optionality!

    I like your style as its resonates strongly with my risk mitigation first approach to financial planning.



    1. If you can generate that plan you will be bullet proof. There are portfolios that do not use return as the goal but risk parity, in other words mitigation of risk is the control variable, not return. I’ve run my portfolio that way since 2004. I preset my risk using the efficient frontier and let the return be what ever the frontier provides. How I knew when to retire was I added up all my Medicare wages on (which are not capped) and I added up all the money I had made. I then looked at my bank account and subtracted what I had in the bank from what I had made. The difference is what I had spent on the previous 49 years of living. My bank account was 2x what I had spent on the previous 49 years of living and I knew I wasn’t living another 49 years. I had essentially created 2 retirements, one for living and one as a lifeboat. My average spending for 49 years was about 80K per year and I funded my house, my kids, insurance, college cost (mine and theirs) cars etc out of that. I consider a portfolio as an interest bearing product I purchased, like a Mortgage is a product I’ve purchased. The portfolio’s interest was paid to me and when it was done I owned the principal and the interest. The mortgage’s interest and principal was paid to a bank and when it was said and done I owned the property. Both are an expression of leverage. The portfolio “product” I purchased was funded out of excess money I did not spend on my life. If you go from this direction you eliminate the idea of wealth and financial independence and the temptation to quit too early from the equation because you don’t consider your portfolio product as net worth per se’, it is just property you own and property you add to periodically, like your house is just property you live in. It has it’s own circumscribed utility. This way you strongly separate living expense from property acquisition and are forced to live within your means while funding your future.

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