Thursday, November 19, 2015

Buying My Time

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It is often said that time is our most precious resource.  After all, we each only get 24 hours a day to spend of our choosing.  I'm "choosing" to write this at 2:20am, for example*.  But what if we had the option to buy more time?  How much would that be worth?  What would an extra hour a day be worth to you? 

[Side noteIf your daily commute is over 60 minutes round trip, eliminating that is an easy way to “create” an extra hour in your day to spend with family or do the things you love.  Your commute may be costing you more than you think!

Why this mention of time vs. money?  Well, the full-time RV / two full-time parents scenario means no full-time job.  No full-time job = no full-time income... and no "full-time" budget.  Things will inevitably be trimmed back.  Education savings - zip.  Retirement savings - also knocked back to zero.  And it's these two big line items where I give myself pause.  Staying home with the kids sounds wonderful, but I don't want that to be at the expense of Mama and my future, or the kid's future.  

Join me on an adventure through a hypothetical life.   Shortly after graduating from college your income was just about $40k/yr, steadily increasing over the next 7 years to ultimately double ($80k).  Let's say you were ever the disciplined investor, maxing out the employer matched portion of your 401K (3% in this case) and your Roth IRA from age 23 to age 29.   Luckily you snagged not only a good-lookin’, but also money smart wife who does the same.  Between you and your spouse, your retirement contributions would look something like this:

Year
ROTH IRA
401K
Total
1
$10,000
$4,800
$14,800
2
$10,000
$5,600
$15,600
3
$10,000
$6,400
$16,400
4
$10,000
$7,200
$17,200
5
  $11,000
$8,000
$19,000
6
$11,000
$8,800
$19,800
7
$11,000
$9,600
$20,600



$123,400

Year
Investment Value
1
$18,812.28
2
$39,529.39
3
$57,087.12
4
$86,083.92
5
$139,162.63
6
$180,899.48
7
$203,748.21

(Roth limits went from $5,000 to $5,500 in 2013)


Invested into an S&P500 index fund (from the beginning of 2009 until now), you have amassed a total sum just north of $200,000**.  This provides an average annual return of about 9%, about on par with historical returns.  Going forward, we’ll assume a 3% inflation rate, or 6% investment growth on our  stash.

                **Based on actual S&P500 returns from 01 Jan 2008 to estimated year end, 2015.  Best year, 2013 (32.43%).  Worst year, 2015 (estimated 1.1%).

The typical plan (and it is a good one) is to continue working and saving, maxing out that Roth IRA contribution and at least the 401K match, but really just pumping up your savings rate as much as possible.  

You are now pushing age 30, with several small children added to the mix, and your perspectives shift.  Time is precious.  How can one maximize it?  What if, instead of continuing with your career, you took some time off to spend with your kids, full-time?  To make this work, you’d need to make some cut backs in the budget.  Among those are your retirement contributions.  So you dial back your YNAB^ budget to $0 for retirement savings. 

Wait, that’s crazy stupid! 

In only 7 years we can already see the awesome power of compounding interest.  We earned an extra $70 grand over that 7 year period.  Imagine if we were to continue this for the next 30 years (only with half the 401K contribution since Mama gets to stay home with the kids full-time now)… Well, no need to imagine.  Let’s quickly crunch the numbers!


Wait?!!! Wha, Wha, Whaaat?!  Almost $2.5 million dollars ($4 million before inflation)!  That can’t be right… Let me re-crunch the numbers.
[Pressing “Calculate” button once more]
Wow, it didn’t change!  That’s a staggering amount of money, which, by the way, was made possible by saving less than 20% of your family’s income every year – a very achievable amount!

Hold on, hold on.  We don’t need $2.5 million dollars.  We’re not Lindsay Lohan after all, and don’t plan on tearing through millions of dollars on cars and what not.  It’s difficult to even fathom setting a goal of $2.5 million for retirement.  I prefer a different method of planning for the future.  First, how much will it cost to live each year?  Considering in our retirement years we’ll surely be debt free (your debt situation is an emergency, after all); and since we’ll be living lean as a couple of aging empty nesters, $36,000 a year seems pretty luxurious.  Assuming we can draw down 4% a year on investments without ever reducing the principal amount (see the “4% rule”), we would need to save $900,000 in investments in order to have $36,000 a year on which to live.  And we would be able to live in this manner for eternity – or in perpetuity in financial speak.  Using our savings plan from above, it would take just over of 22 years to reach our golden nest egg of $900,000.  We’ve already been trucking along for 7 years, so that’s only 15 years to go.  It’ll go by in a flash!  You’ll be retired by age 45!  By then the oldest child would only be 18 and… and… and moving off to college.  Your sweet little boy has grown up.  And no amount of money can buy back those years lost when the kids were are at such a precious young age. 

I don’t like that plan, for you or for me.  So let’s reconsider this idea becoming a stay-at-home dad.  To make it happen, we live on the cheap including putting retirement savings on hold, just for a little while.  What kind of damage will this cause to our long term financial picture?  If we choose to stay home for 3 long wonderful years, we’d probably end up delaying retirement what, an additional 6 years to make it up down the road?  Let’s take a look…

Wrong!  And in the best way possible.  Taking off three years from retirement savings now would require only 2 years of delayed retirement in the future.  So instead of a total timeline of 22 years to the $900k stash, it becomes about 24 years.  Retirement at age 46 – not bad!  Even better, we get to stay home for three of those years enjoying more diaper changes than you thought was ever possible as a traditional career man. 

That’s counter-intuitive, isn’t it?  We’re trading 3 years off now for 2 years more work later, yet still achieving the same financial goals.  What happens if we stretch this stay-at-home timeline out even further.  We stay home a full 6 years, so the youngest is well entrenched in school before deciding to get back to the daily grind ourselves…. The result?  We would only have to delay retirement an additional 18 months to stay home for another 3 year stretch.  So now $900k comes at 25 ½ years (still 47 years old!), and we stayed home full-time with the kids for 6 great years (or ages 3 to 9 for the oldest in this scenario).

That’s a remarkable discovery.  It’s as if we are creating time out of thin air.  If I offered you a trade that you’d have to work and additional 3 ½ years a couple of decades from now in order to take 6 years off now, would you take it?  That’s the power of compounding interest.  That $200k stash that was built up in your 20’s continues to grow, even while you are playing whiffle ball in the backyard with the kiddos and not contributing a dime towards retirement. 

That’s the true power of money.  When it can set you free to do this things you really love in life, as opposed to simply being used to buy the things you’ll only enjoy for a short while, simultaneously crippling your financial freedom. 

This number crunching exercise was, of course, more for my own discovery than for yours.  After investing in my first mutual fund at age 16, and maxing out my Roth IRA every year since my junior year in college, the idea of suddenly halting retirement contributions is a terrifying one.  It goes against every bone in my body.  But the realization that I’m not throwing away my retirement by putting things on hold for years on end is very encouraging.  Even while taking a break from work, compounding interest continues "saving" for retirement for me!  

The numbers don’t lie, but they can be misleading.  This plan won’t work for everyone.  You have to first have saved up a sizable amount of money.  This compound interest benefit is amplified with every additional ten dollars saved.    In this situation we assumed we have saved $200k by the time we hit age 29.  I’m some bit older than 29 now, and I don’t yet have $200k in retirement investments, so this was just for illustrative purposes.  But while my numbers don't match exactly, I've saved enough that the theory holds true.  I can defer IRA contributions for many years now, only to delay retirement by a fraction of those years in the future.  This is only possible because of the savings my wife and I have accumulated up until this point.  If I were just starting out on the path of retirement savings, putting it on hold for any period of time would be out of the question. 


...This post only relates to delaying retirement savings, but doesn’t address the idea of how in the world a family with two stay-at-home parents can support themselves in the present.  What about food, rent, medical costs, and everything else that life throws at you?  That’s another discussion for another day.  Stay tuned.

  *It’s now 4am, and no I’m not insane.  I’m on a 12 hour night shift at work, and compared to many nights this was an incredibly useful and productive way to spend my time.  Never fear, your nation’s nuclear deterrent force remains fully engaged and at the ready. 

^The link to YNAB ("You Need a Budget") above is a referral link, which discounts the software purchase if you are interested, and YNAB pays me the equivalent discount amount via PayPal.  Whether or not you use the referral discount, check YNAB out.  It's amazing.

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