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Which is more important to your clients – hitting a net-worth target (money) or getting to financial security as quickly and safely possible (time)?
Hitting a net-worth target is by far the most popular answer I get when I ask this question. It’s easy to pick a number like $1 million and set your sights on getting there. It’s what happens after you get there that matters.
The less popular answer is the harder goal to attain – figuring out how many years it will take to reach financial security – your age at financial security (AFS).
Those two goals – money and time – are related. But which one you choose will have a profound effect on your quality of life during your golden years.
Why time is more important than money
You will never get one second more than what you already have in your time bank. There are things you can do to extend your life expectancy – a clean and healthy lifestyle, for example – but that will work against reaching financial security, because your retirement savings will have to be greater to support you for those bonus golden years.
The good news: You’re on track to become a millionaire.
The bad news: Millionaires are far from being financially secure.
The tradeoff between money and time is a no-brainer to me. I’ll take more time over more money any day.
What is financial security?
Financial security can mean very different things to different people, so we need to define what it means in the context of this series of articles. Put simply, it means having enough money saved so you can quit your day job and live off your investments. It does not mean being “rich” or being a millionaire. It means being able to live comfortably and not having to worry about money.
For someone who is accustomed to a frugal lifestyle, financial security can be had for as little as $667,000 in savings. For someone who aspires to live the good life, it can take $3 million or more in savings. It all comes down to personal preference, and I’ll lay out the numbers for you.
A tale of two investors
Joshua is 25 years old and his grandfather told him that if he worked hard, saved his money, and invested wisely, he would one day become a millionaire. For the rest of his life, according to grandpa, Joshua would be ”on easy street.”
Jessica is also 25 and her grandmother told her that it was important to save enough to become financially secure as early as possible in life.
In both cases, the advice from the elders was wise. But it was also fundamentally different. Joshua’s grandfather gave him a money goal, while Jessica’s grandmother gave her a time goal. Jessica’s grandmother was wiser than Joshua’s grandfather. Here’s why.
How can Joshua and Jessica apply this sage advice?
Joshua now has a number in his head – $1 million – that he believes will put him on the path for a generous retirement. How realistic is this assumption? It’s impossible to know the answer without knowing other things like how many years it will take him to get there, how much income he will need to finance his lifestyle, and how long he will need the money to last.
Joshua has a money goal, but he doesn’t have a plan. What will happen if he gets to $1 million when he’s 55 years old? Wouldn’t that be great? Not necessarily, because that would mean the $1 million would have to last for the next 35 years. That’s very unlikely.
What if it takes him until he’s 75 years old to reach the $1 million goal? That would mean he worked an extra 20 years and still doesn’t know if the money will last for the rest of his life. Can you see the problem with having a money goal?
Focusing on a money goal is a fool’s errand. Let’s turn our attention to Jessica and find out if her goal is any better than Joshua’s.
Jessica is focused on how long it will take her to reach the point of financial security. The way she sees it, the dollar amount isn’t what matters. It’s how old she’ll be when she reaches the point of security that really counts. She doesn’t have a money goal. She has a time goal, which is the basis of her plan.
Let’s do the math
With a little help from a standard online retirement calculator we can easily compute the outcomes for Joshua and Jessica. We just have to solve for their different goals – money for Joshua and time for Jessica. First let’s define our parameters so we can make the comparison fair and reasonable.
- Annual income growth: 3%
- Annual savings rate: 7.5%
- Rate of return before retirement: 9%
- Rate of return after retirement: 4.5%
- Rate of inflation: 3%
- Nest egg at age 65: $994,700
- Nest egg required to reach financial security: $2,008,500
- Age at the point of financial security (AFS): 72
In Joshua’s case we’re solving for a money goal – $1 million. He will get there at age 65. But as Walter Sobchak put it in The Big Lebowski, Joshua is in for ”a world of pain” after he reaches his money goal at age 65. If he quits his job, his money will run out at age 79. Actuarial tables say he will live until age 90. What will he do when the money runs out? Become a greeter at Walmart? A cart wrangler at Safeway? A world of pain, dude.
For Jessica we’re solving for time. She did the math and found that she needs $2 million to reach AFS – the point of financial security. At her current pace of earning, saving, and investing she will get there when she’s 72 years old. This is not very welcome news for Jessica but at least it’s the truth.
Armed with this information she has options. She can save more, reduce her living expenses, delay her retirement, or aim for a higher return on her investments. One thing she won’t do is retire when she has $1 million in the bank.
Joshua is a money traveler. Jessica is a time traveler. I’m with Jessica.
Erik Conley is former head of equity trading, Northern Trust Bank, Chicago. Teacher, trainer, mentor, market historian, and perpetual student of all things related to the stock market and excellence in investing.
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