Another day, another rant about friends. (Yes, I’ve done this before)
A group of friends and myself were discussing over email about how our works suck, and how it is difficult to find the “right thing” for your life goals. One of them replied: “Well it’s easy, what would you do if you won the lottery”.
I jumped instantly, and replied it would depend on the amount, but that if it made me reach financial independence I would quit my job.
Another friend followed up and emphasized on the importance of the amount. He said:
Stockbeard’s right about the lottery, my answer hugely depends on the amount we’re talking about.
I don’t think one can really have “too much” money. I wouldn’t do the same thing with 1 million, 100 million, or a thousand billion dollars.
With 1 million, I’d keep my current life.
With 10 million, I’d invest, become financially independent, and see what’s left to live a comfortable life.
With a billion, I’d do the same for the people I care for, and research what organization I need to give the remaining money to be used for greater good. With a thousand billion dollars I’d cure cancer.
I Looked at his first two numbers (1 million and 10 million), and what he’d do with those. And I jumped the gun. If you’ve followed sites such as us on HowToRetireEarly, or other financial independence blogs, you already know that 10 million is way too much to reach financial independence. There’s good real life evidence that 1.5 million is enough to reach financial independence in a very comfortable way, therefore 1 million is definitely a life changing amount of money as it takes you very close to the target.
But let’s do the math. How much does one need to “live a comfortable life”? This is very subjective of course, but one popular study indicated that above $75’000 of yearly income (in the US), one’s level of happiness doesn’t increase significantly anymore. I’ll therefore assume that we target an income of $75’000 a year. (By the way this value would work in most countries of the world given that it’s pretty much cheaper to live in almost any other country than the US.)
The 4% rule tells us that for a $75’000 income per year, one needs 1.875 million dollar. I rounded up the numbers a little bit for my friend and told him that he’d be fine with 2 million dollars. I called him out on the 10 million value, and after explaining the $75’000 target (which he agreed was reasonable) and the 4% rule, I told him:
You only need 2 millions to “live comfortably”. Your 10 million guesstimate is so far off it’s an error of magnitude at this point, this is ludicrous. Conversely, your 1 million value gets you so close to the 2 million goal that it’s a mistake to continue to live your life “normally” if you ever receive 1 million. For the sake of argument, someone who earns 1 million overnight will reach 2 million within 10 years if they kept their job and did not save anything additional. More realistically, someone with your job [he makes more than $100’000 a year] would reach 2 millions within 5 years, with that 1 million headstart.
This led to a bit of discussion, and my friend (who’s a very open minded guy, and happens to like learning new stuff) got interested in my numbers and the “4% rule”. He understood the “$75’000 a year” target, but he did not accept the 4% rule as easily. I’ll skip the long discussion, but in one email, he said:
I’ve tried to invest my money. I’ve gone to investment banks and other service providers. Their proposed return on investment is 1.5% on average, for their best “hands off” plans. The very best I found was 2.5%, but it had way more risk than I was willing to take. So I’d really like to know where you found your magical investment that gives back more than 4% on average. And I believe it has to give back more than 4% otherwise you would not be able to withdraw 4% safely.
Emphasis mine on the “hands off”. I totally get my friend’s situation, because I was there less than 18 months ago. Normal people are too busy to understand finances, we have other fish to fry. Shouldn’t your financial advisor have your best financial interest at heart anyway? Well, they don’t. Their main goal is to make money for themselves and their shareholders. You come third, and only because they know you’d leave if you didn’t get at least the scrapes. It’s your money they’re playing with after all, so there still has to be something in it for you. Their whole job is to figure out the threshold at which you’re willing to stay in business with them. It is in their best interest to make you think personal finance is a complicated matter: “only them and their expensive products can help you save money efficiently”.
Anyone who’s stumbled on sites such as MrMoneyMustache or bogleheads *knows* that investing on the market is actually reasonably simple, much simpler than what advisors lead you to believe. It also carries much less risk for long term investors than what advisors want you to think. As a matter of fact, the simpler it is, the better results you’ll get (at least for people who look for a “hands-off” solution)
I trusted financial advisors who had not my best interest at heart for the same reasons that my friend cannot find any return rate higher than 2.5%: Because I believed that “understanding” this whole finance thing and doing some of it myself was way too complicated.
So I kept asking the banks and financial advisors for the “hands-off plan where I don’t have to do anything”. This is their cue for selling you an expensive product: you just admitted that you know nothing about finance and are not planning on becoming any more knowledgeable in the future. You’re practically asking them to rob you.
And as long as you keep that kind of attitude, you’re just hurting yourself and getting the 1.5% return rates that you deserve.
Don’t get me wrong: I don’t blame the guy who’s getting scammed by the banksters here, he’s the victim. But it is true that honest people like my friend assume that all professionals act a bit like a doctor: they try to serve you. I have found that this is not true of most financial institutions (not necessarily the people who work for those, don’t get me wrong). It’s probably a bit gullible to believe that, but I swear that if you’re an honest person, you assume 95% of the world is trying their best to make your life better, just like you’re trying to make it better for the people around you in your own work (whatever that may be). Turning around to understanding that financial institutions serve themselves first is the first step of understanding the situation, and it hurts a lot. It destroys many things you took for granted about mankind and trust in general. I might sound melodramatic here but this is really how I felt about my life insurance when I discovered how much money they were taking from me. Once you go past that phase, the next step is to understand that there exists real competition in the finance market, and it’s up to you to find the right investments with low costs. Here, I won’t advertise for any specific agency or product, but bogleheards.org is a great resource. People who read that blog know the drill: low cost total market index funds is the “hands-off” solution you’re looking for.
The only difference I found between financial products and other products in a capitalist economy is that for some reason, word of mouth doesn’t seem to work as well for financial products. I want to believe that with the internet, knowledge will spread eventually, but it sure is more difficult to find a good financial product for the neophyte nowadays, than it is to find a gadget with good reviews or a decent restaurant…
Fast forward 18 months, I now know that managing a simple portfolio is not only easy, it has removed insane amounts of stress off my shoulders, because I know that I am in full control of my financial future.
A follow up to the discussion with my friend is that I have shared my portfolio allocations with him (it’s a 5 fund portfolio from Schwab trying to copy a Vanguard 3 fund portfolio. It does not get any simpler than that, honestly). He replied this was too complicated as it meant he had to do the work himself and it was not a “hands-off” solution. I’m now trying to convince him that the 20 minutes I spend every month looking at my finances are way worth the peace of mind. We’ll see how it goes.