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She who dies with the highest net worth...


Bet you thought I was going to say "still dies", didn't you? No -- it's worse than that.

We've talked a lot about the importance of cash flow management on the blog these past few weeks. We've discussed how it's the foundation of financial success. We've gone into "four rules" of cash flow management. In particular, I'd like to draw your attention to Rule #1: Give Every Dollar A Job. If you die while sitting on top of hundreds of thousands -- or millions -- of dollars in net worth, have you really followed rule #1?

Or, as is much more common, have you just accumulated wealth without really having any idea of what you wanted to do with it?

Accumulation and decumulation

Any good financial planner is familiar with the phases of the financial life cycle, in particular the "accumulation" and "decumulation" phases. In accumulation, the focus is on building wealth. In decumulation, the focus should be on spending it.

Yes, I said "should". I don't often say that word, as I don't like to judge, but I'm doing so intentionally now. Stephan Pollan says it more eloquently in his book "Die Broke" than I can (though I've tried). Money is meant to be spent.

Now, I get it. As engineers, we're really fond of making numbers go up. We're naturally inclined to optimize, to make things better. When I ask tech professionals what would make them happy with regards to their finances, the answer is quite often something like, "I'd like to see my net worth grow 6% year-on-year", or "I'd like to see my retirement assets double between now and retirement." Why? For many of us, "making the numbers go up" is an end to itself.

Moreover, we've spent the entirety of our adult lives in the "accumulation phase". We've gotten good at socking money away and keeping a weather eye on our net worth to make sure we're on track for retirement. However, I've seen a lot of clients who have trouble getting themselves out of that mindset -- as they transition to retirement, they find themselves clinging to an accumulation-based cash flow framework that's based on income, rather than a decumulation-based framework based on wealth.

"Income-based" v. "total return" retirement planning

In the past, this "perennial accumulation" mindset was the financial planning norm. If you were retiring, you'd buy enough income-producing assets (bonds, real estate, etc.) to live off of the income, and keep the rest in stocks for "mad money" or your legacy. This is untenable for most people in the modern day, simply because current interest rates are historically low.

This forces people away from "income-based" retirement planning. And that's a good thing.

Why? Well, for starters, "income-based" retirement planning means chasing after high interest rates. High interest rates, in turn, are only available for commensurately riskier investments, which can end up causing you to take on more volatility than you should, given your risk tolerance and/or risk capacity. You can build a much more effective and flexible portfolio by taking a "total return" approach to financial planning, one that focuses on the volatility and expected returns of the portfolio as a whole, rather than only looking at the income it produces.

More importantly, "income-based" retirement planning completely ignores the concept of a "decumulation phase". The end result is that your net worth just keeps going up until you die. (Most financial advisors would be just fine with their clients doing this -- their cost structure incentivizes it!)

And no, that's not a good thing. You're leaving a lot of money on the table, unallocated -- which is another way of saying that it may as well be lit on fire as far as your life and goals are concerned. That's money that could be used with intention.

You could use it to retire earlier.

You could use it to help your kids along before you die -- maybe give them more help with college expenses, or their emergency savings, or the down payment on their first house.

You could use it to live a better life now.

Retirement: a different way of thinking

Because we've spent our entire adult lives in the accumulation phase, it can be very difficult to retrain our brains to think in terms of decumulation. When we were accumulating, we managed our cash flow based on income and expenses. If our goal is to "decumulate" our wealth, this requires a new way to think about cash flow management, one based on Monte Carlo simulations rather than the 50/20/20/10 rule.

Not only that, but it requires a new way to think about spending our time. As tech professionals, we often adopt a "work hard, rest easy" mentality -- our time is spent either exerting copious amounts of energy earning money or taking breaks to restore said energy, be it through lazy weekends, vacations to tropical climes, or some other relaxing pastime. In retirement, though, we get to decide how we spend our days. A lot of us imagine that it will look like a 24/7 version of those pre-retirement breaks I mentioned, but when you're not burning all of your energy on the weekdays, a "relaxing pastime" can quickly go from "relaxing" to "boring".

Take a moment and think about it. If you could retire tomorrow, what would you do with your days? How long would it take you to get bored of the activities you normally reserve for weekends and paid time off? What would you do then?

What do you want to do with your life?

I know, that's an unsettling question, but it's kind of important. If the answer is "well, I like working", don't feel ashamed. Actually, you should congratulate yourself -- humans have a drive to find fulfilling work, so you're more self-aware than those of us who said that we just want to relax the rest of our lives. (I could sink a lot of time into video games, personally.) The difference is that in retirement, money isn't in the equation anymore, so you get to define the terms of your "employment". You get to work with the people you want, on projects you want, at the hours you want. Maybe that means volunteering. Maybe that means art, whether writing, painting, acting, or anything in between. Heck, maybe that means building and scaling up your own business.

Never retire -- now

In "Die Broke", Pollan paints an inspiring picture of life when one has broken free of the traditional retirement mindset: one of Odyssean adventure, in which "retirement" is such a meaningless term that one of the four pillars of the book is "never retire". And if there's no such thing as "retirement", you can start transitioning your mental framework now! For example, you can:

  • Adopt good cash flow management practices, freeing up more of your money to go where you want it to.

  • Be intentional about how you spend your free time, exploring activities outside of your standard "relaxing pastimes".

  • Consider saving for a "mini-retirement", an unpaid vacation of one or several months where you can test your hypothesis of what your ideal retirement might look like, before making the leap!

  • Think of unconventional ways to spend your money. Examples include recovering your free time, moving to a lower-paying but potentially more rewarding career, or even starting your own business!

Got some ideas already? I'd love to hear them! Drop a comment, or send an e-mail. This is why I do what I do.

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