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When Should I Retire

People pay me a lot of money for advice. It’s called consulting. Questions on taxes and money are what start the conversation. But once we get under the hood it becomes clear there is another motive. The real questions involve medical issues, raising children, starting a business and retirement.

It would be easy for me to give a short pat answer. It wouldn’t do much good, but I could do it. Instead, I ask a series of questions helping the client to come to her own conclusions. Some crazy tax guy from the backwoods of northeast Wisconsin will never have clever enough words to convey the right message. I have to help the client find there way there  on their own. If I say “Yes” to the best business idea ever and the client is not ready or in the right mindset, they will fail. 

And it always comes around to the finish line, aka, retirement. When can I retire? Should I retire? 

I could give you a simple formula if you want. Better yet, skip the whole post and scroll to the bottom for the quick and easy answer, for all the good it will do you. 

However, it might be better if I share a story and ask a few questions first.

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The Financial Agony of COVID-19: Part II

Five months ago COVID-19 was just getting started. Fear was rampant. People and businesses made rushed decisions with long-term consequences. In the U.S. fewer than 10,000 people had died from the virus, yet fear was many more would die. 

Over concerns clients and readers (that is you my kind friends) would make poor financial decisions, I published an article encouraging caution and recommended people relax, breathe deeply and think before making a decision. By thinking before acting, I felt my people would be in a better position to make decisions that would serve them well. 

Then I watched my readers act and react on social media. The spread of COVID-19 should have run a chill down the spines of any normal human being. But social media does not bring out the “normal” in people. Some over-reacted with the attitude everyone should shelter in place forever. But as always happens, the disease became “normal” as we saw it every day. Before long people wanted to get out and act as if nothing was wrong or that the risk had ended. The middle, sensible, ground somehow lost out. 

It is sad the intelligent solutions lost out. Again, social media was rife with conspiracy theories, questionable remedies and outright lies. Social distancing, washing hands and masks are three simple things everyone can do to slow the spread of the virus until a vaccine can end its rein of terror.

Logic didn’t work 5 months ago, so now I have to get blunt. This is a financial blog so there is a reason for the focus on a medical issue. Your reaction to COVID-19 is a large part of the way you think. If you conduct stupid, risky behavior with your life, you probably do even worse when it comes to money. The best way for me to convey this message is with the good cop/bad cop routine. 

There are two parts to this post. Part 1 is a mild comedy sketch of the facts. In Part 2 we will put it together and pull out meaningful and valuable data you can use. This value will increase your wealth and allow you to live long enough to enjoy it. Remember, Part 1 is dark comedy and not my opinion. I don’t want hate mail before you read the whole story.

The faulty logic used in our dark humor skit is more than a risk to our physical health; it is the same mindset that harms you financially. We actually have people who believe 1,000 or more dead Americans a day isn’t that bad. There are people who think it is okay to carry on as if nothing has changed because only old people suffer the consequences. They forgot their Hemingway: Do not ask for whom the bell tolls; it tolls for thee. (For exact quote use the link.) The clock keeps counting for all of us and since I see no old people saying, “I don’t care if young people do stuff that might kill me,” I assume today’s young people will want respectfully behavior from the future’s youth.

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Now is the Time to Retire

Maybe today isn’t the ideal time to take the early retirement you planned. But the day is fast approaching. The pandemic will pass, economic activity will increase and the market will travel to new highs. Beginning retirement when the economy is at the beginning stages of a bull market allows for the longest period of growth before your budget is seriously challenged with declining asset prices.

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How Much Money Should You Keep in Cash?

Rules of thumb are an easy way to quickly see where you stand financially. Once you reach 25X your spending in liquid net worth (the 4% rule presented as a multiple of spending) you are assumed to have enough to retire under the 4% rule, regardless your age.

However, as we are seeing with the current market turmoil, the simple rule of thumb has one fatal flaw. If you reached your 25X goal a few months ago and decided this was the time to step away from traditional labor, you now face a withdrawal rate from your index funds a third higher than expected. This will reduce the account value early in the distribution phase, lowering the total amount you can get from the investment over your lifetime.

Another rule of thumb is to keep 6 months of spending in cash in case you become unemployed. Under a normal job loss or economic decline this would be a reasonable policy to follow. Unemployment insurance can provide additional cushion to the 6-month cash reserve.

Black Swan events (unexpected negative economic events such as the housing crisis or pandemic) throw the whole rule of thumb out the window. Black Swan events do not happen often, but they do occur every decade or so. Looking back at U.S. history, it seems something always happens every decade to knock the markets lower and slow economic activity. The 2010s are the only decade to avoid that fate and 2020 seems to be making up for the oversight.

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Motivational Goals

The word goal has taken on dreaded status. Over the decades I’ve attended several informational and motivational seminars. Whenever the topic of goals comes up, heads duck. It shouldn’t be that way.

I think people dread goals because they feel obligated once they are on paper. There is also some fear of stating your goals because they entail your deepest desires. 

The thing is, goals should change. Not every goal deserves consideration. It would be nice to skydive. Sure it would. But after careful consideration other goals might interest you more. More family time might be the goal you wish to pursue instead and the rewards (in your mind) might be better than falling from 10,000 feet.

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Recovering from Burnout

Burnout is only one step on a road to hell. Left unchecked it can cause serious damage to your health. 

If you experience burnout and take no remedial actions you can start to exhibit symptoms of something much worse. 

The first step toward a nervous breakdown is burnout. Fatigue lowers your mental defenses. When the situation continues to pound feelings of desperation can set in. Helplessness is a large factor of burnout.

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Investing in a Retirement Account is Like Taking Out a Loan

Traditional retirement plan contributions come with a loan attached to it with a variable rate of interest, to be determined at a later date by the tax code and your income level.

We all know that traditional retirement accounts get a tax deduction at your ordinary tax rate to the retirement plan contribution limits. We should also know that these account grow tax-deferred and that all distributions are taxed at ordinary rates.

This is a real problem if your goal is to maximize your net worth. In the early years the tax benefit makes it seem like it is the best deal on the planet. But as time passes the math tells a darker tale.

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