Don’t miss the follow-up post on the Portfolio Approach to Passive Income.
The most satisfying part of Microsoft Excel is the F9 key. It ignites (some might say, “refreshes”) any complex financial model; with a single tap, it can tie together tabs, inputs and conditional IF statements to produce a beautiful number. A single cell can indicate if your investment clears its return threshold or if your portfolio can withstand a market crash. That same cell can also tell you if you’ve amassed enough savings to eject out of the corporate rat race and start living the life you’ve long yearned for.
Every year an army of Wall Street professionals ranging from 25 year old associates to newly minted Managing Directors perform their annual F9 ritual. They log into their password-protected spreadsheet, delicately input their bonus into an empty cell and then decisively strike F9.
It’s time to see if they’ve hit their “Number.”
The numbers don’t lie (but do they tell the truth?)
The Number tells you when you can stop working and start savoring the fruits of your labor. It’s the holy grail of delayed gratification meets living for the present. And it’s deceptively simple to calculate. First, you extrapolate your spending. Next you take your total corpus (i.e. how much money you have) and apply a very low-risk return assumption (such as Muni Bonds or an FDIC-insured High Yield Savings account). Then you say a small prayer and hit F9.
If the spreadsheet flashes GREEN you’ve hit pay dirt. You can promptly resign, ditch your alarm clock, launch that lifestyle business and kickstart a long-needed workout regimen. You never have to work again.
But the sad part is that unless your name’s on the door, The Number will always flash RED. It’s virtually impossible (especially in a post-GFC world) to hit The Number as a salaried employee. I’ve spoken to hundreds of professionals who have tried (and while many have taken multi-year breaks, myself included) but have never met a single FTE in their 20s-40s who actually hit Their Number and stopped working. The math on The Number will never work: it’s too complicated and undervalues your most valuable asset.
It’s too damn hard to calculate
If you ask Tim Cook to forecast how many iPhones he’ll sell next year, his forecast would be surprisingly on point. (After all, that’s why they provide quarterly guidance to their shareholders.) If you ask Cook how many he’d sell in ten years, he’d have no clue (remember, the iPhone is only 12 years old). And in 20 years? Hell, the iPhone will probably be connected into our brains somehow.
This reasoning applies to The Number. If you increase the time horizon, you increase the number of variables at play and the uncertainty of the final output. Let’s work backwards and assume you’re an 77 year old (male) RadReader. The average life expectancy is 78 (81 for women) so, on average you have 1 year of life remaining. Forecasting your expenses and investment returns should be pretty straightforward, right?
Well any good statistics geek will know that averages don’t paint the full picture. In fact, the standard deviation of life expectancies is 15 years. This means that our 77 year old homie has a 34% chance of living until he’s 92. One variable completely alters the forecast – and that’s for a 77 year old! (Oh and by the way, someone born today will live to be 150.)
Yet most Number aficionados are far from septuagenarians, in fact they’re more likely to be post-MBAs (unmarried but with significant others) or parents of young kids.
The unmarried Post-MBA ?
The post-MBA will have the most uncertainty to codify into their model. Will they get married? Have kids? How many? Will they both work? Where will they live? Will they ever change jobs? These are the personal variables; what about the global ones like inflation, tax rates (and not just individual rates, i.e. the SALT effect), market performance, and entitlements (will Social Security even exist?). Plus, they’ll still need to forecast the 68% chance they’ll die somewhere in between 62 and 92.
The certainty of children ????
The math for the parents is slightly easier. Some of the big ticket items (likebuying a home) are probably out of the way and there’s a touch of greater certainty around raising kids (such as childcare and college savings plans)
But these thirty-somethings face their own slew of variables: Will their kids go to college? Public or private? Will they support them post-graduation? Will they downsize their home as empty nesters? Will they even need cars? Do they need to support their aging parents? And a key variable (the terminal value of the DCF) how much will your kids inherit?
Fine, retirees can nail the number ??
And if you’re still unconvinced about the difficulty of this calculation, it doesn’t get any easier for retirees. In fact, retirement spending isn’t linear, it looks more like a smile: It starts high, gradually declines, and then increases toward the end of a retirees life.
Life ain’t linear, man
Wouldn’t life be easy if it were a series of linear extrapolations. Thankfully it’s not, because it would also be boring AF. And while it’s hard enough to model an investment in Excel, when it comes to human existence the sheer number of variables, combined with timeline uncertainty make The Number impossible to calculate. It was even hard to simply categorize these variables (alongside their age-related certainty/uncertainty):
But y’all refuse to give up. There’s a running joke that goes:
Q: When’s the best time to leave Wall Street?
A: After next year’s bonus.
The Max() approach
There is one way to try to make The Number work: by assuming the most conservative approach to every variable.
- Kids? (Currently have 2, Max=3)
- Public or private? (Max = Private)
- Dual income household? (Max = No)
- Number of cars? (Max = 3)
- Tax rates? (The AOC wing takes over, Max = 70%)
- Economic climate? (Max = secular stagflation)
- Cost of healthcare? (Max = ??)
- Social security? (Max = gone)
- Kids’ inheritance? (Max = a lot)
- Life expectancy? (Max = 150, crap!)
This is why a salaried employee will never hit Their Number.
Taking the conservative approach, while intellectually honest is completely unrealistic. Imagine if you were learning to play soccer in an adults’ league but were apprehensive about getting injured. You could throw on your cleats and get on the pitch. Or you could get shinguards, a cup, elbow pads, a mouthguard, a helmet, disability insurance, and ask the coach to play you in the least risky position. And here’s what your friendly match would look like:
Mapping your life to every imaginable risk is not a way to live. Especially for a healthy, smart and dynamic RadReader. Aiming for The (Conservative) Number ascribes zero value to the one thing that makes you unique: your dynamism.
More specifically, in pursuing The Number you’re mandating that you have zero future earnings potential – you’re ascribing a value of ZERO to your human capital. To get finance-geeky, it’s like viewing your personal upside as a bond, when really you’re equity. Don’t undervalue yourself!
A few lucky ones will hit their Number
The math behind The Number is prohibitively intractable due to a structural contradiction. Risk-free rates are low for a reason: they don’t contain any risk. So to make up for that fact, you have to earn a ton of money.
And some people do. Like The Rock. In 2018, Dwayne Johnson earned $119 million. Even if you only wipe your ass stacks of hundos, $119 mill should mean that you’ve cleared The Number. But here’s the crazy part, hitting The Number doesn’t guarantee that you’ll overcome a scarcity mindset. Even if you’re Hollywood’s highest paid actor.
Long before The Rock hit his number, he and his mom found themselves on the brink of homelessness. A few years back, he told Vanity how he looked to his childhood idols, Stallone, Schwarzenegger and Eastwood “who built their bodies and became successful.” To this day (and despite hitting The Number), he still feels a compulsion to maintain his hulking physique. But he also acknowledges that with over $100 million in the bank, this fear may have overstayed its usefulness:
“I still wake up every day with a deep-seated fear that I have to keep working out so that I don’t get evicted tomorrow. Some day I’ll prob need to dredge that up with a psychiatrist.”
So should I abandon the quest?
Kinda sorta. You absolutely should be diligent about saving, investing and managing your expenses (i.e. avoid lifestyle creep but don’t go FIRE-crazy). And you should use spreadsheets that take holistic views of your finances. But there’s a secret weapon, an arbitrage of sorts that gets completely overlooked in the brouhaha of The Number: YOU.
There are many so many elements from our work that bring us tremendous life satisfaction. This gets lost in the bum-rush of Monday morning meetings, mind-numbing PowerPoints and a-hole bosses. But tending to one’s craft, learning new skills, and creative problem solving are key components to leading a rich and fulfilling life. So why on earth would 30 or 40-somethings want to stop pursuing these activities?
Let’s work backwards
I love asking people in pursuit of The Number a simple question: If you won the lottery today, how would you spend the next five years of your life? Most people cannot answer this question (“I don’t even play the lottery, so not worth considering”). And to be fair, it’s a bit rigged.
Five years is a long time, too long to pick one activity (family, travel, exercise, sleep) and do it for an extended period. The math here is simple: sleep 8 hours, spend 3 with your family, exercise and meditate for 2, and read for 90 minutes. Even with these generous time allotments (eight hours of sleep?!?!), that leaves 9.5 hours each day (or 48 hours a week) of time to kill!!!! (Technically, weekends wouldn’t mean anything, so it’s actually 67 hours…)
Harvard Business School professor Theresa Ambile interviewed 120 newly retired professionals and found that the things that made them happiest in retirement were quite simple: not using an alarm clock, the ability to pursue a hobby, not needing to commute and the flexibility to spend time with family.
This is where the your secret arbitrage comes in. The pursuit of The Number is a complete distraction. In fact, it’s worse. It’s sending you on a wild goose hunt in the wrong direction – taking precious mind space away from you finding the intersection of 67 weekly hours pursuing interesting work, with cool AF people, while retaining basic life flexibility.
My friends, this already exists as “a job.” And if doesn’t, there are wayyy more opportunities to create this opportunity for yourself. Stop chasing The Imaginary Number and focus on finding this instead!
Be the DJ of your own career
The Number prescribes one path. Work your butt off until you hit it, then enjoy life. Hopefully, you can now see how this methodology is inherently flawed; but that doesn’t mean we should discard the baby with the bathwater.
Instead, think of yourself as a DJ with all sorts of knobs to adjust the energy and intensity while blending tracks into one beautiful experience. The knobs are your work, your investments, your spending and how you allocate your time. There’s no end to career. Nor is there a start to retirement – just tiny tweaks along the way that respond to the energy of the crowd. Your family, your community, your friends – Your crowd.