Millionaire Librarian

Pensions have become less and less prevalent over the decades and are solidly outnumbered by their defined contribution (401k, TSP, 529, etc.) cousins. Many people view this change as just another sign the world is getting harder for the average worker. However, if you plan to retire early, then defined contribution plans I think are the better deal.

The problem with pensions is that like social security they generally require you reach a certain age before you can begin drawing them. This makes sense for the company because someone drawing from a plan for thirty years will be paid much more than someone who starts drawing at an older age for less time. However, for those of us who plan to retire early then likely the only possible option with your pension is to delay taking it by deferring it until later. This doesn’t help much if you are retiring early. Sure it will help later, but only a few calculators and tools I have used have the complexity to model deferred pensions correctly. Also as a federal employee, the federal government is putting a huge amount of money to fund my pension. I would appreciate the option of being forced to put in my part and the government put in their part into a defined contribution instead.

Many pensions are extremely complex and the best book I have found helping to dissect and explain them is Grumpus Maximus’ “The Golden Albatross.” However, to paraphrase him, all pensions are unique and you need to dig into the documents to fully understand them.

Most of the federal pensions I have looked at are a formula which consist as a coefficient X years worked X some sort of average of your income. This means that increasing the numbers you work or your income will directly impact the size of your pension.

Another common attribute of pensions include either increasing based on some sort cost of living adjustment or not. This may include during the deferred years or not.

Some pensions allow you to retire as long as you have the required number of worked years, disability benefits, or a combination of years worked and age.

As you can see the complexities of pensions really require for you to dig in and read and probably reread the documentation. Even among Federal pensions they are vastly different. Army NAF, Air Force NAF, Marine NAF, Navy NAF, Appropriated Fund, Active Duty Legacy Retirement, Active Duty BRS, Wage Grade, etc. may all work similar jobs or in the same squadron, but have entirely different pensions. Making it more confusing is moving between the systems and how certain things will move or port with you, while some other you fully adopt of the other system.

In conclusion, pensions are extremely complex and a bit antiquated, but are a form of forced saving for retirement that is needed in many fields. The majority of pensions today can be found working in government and in especially dangerous or jobs that require youth like military, police, or fire department. Though some pension attributes might be similar or rhyme it is rare to find an exactly same pension in two different systems. Therefore, find or request your plan documents and spend time becoming familiar with them. In my experience, even human resources barely understands much of the pension system and its just best for you to do your own research.

Something I have learned is that talking about money can be very off putting to most people. i can think of few other topics that while not lewd or violent can evoke such a strong reaction. There are a plethora of reasons for this and acknowledging some of those reasons may help us be able to discuss it easier.

Money is measurable in numbers which makes it feel competitive. It is hard to measure soft skills like how honest someone is or how hard they work, but money can be seen in where someone lives, what they drive, or a number in a bank account. It is interesting that where you live and what you drive greatly influences negatively how much you have in your account, but that is another topic for another day.

Some people feel that if they have little money then people will think of them negatively. Additionally, some people are very judgmental of people who they view have too much money or that they view unfairly came into wealth.

Your ideas of money are not entirely your own. Siblings, coworkers, family, friends, and anyone else you may come in contact with you may influence your views of money negatively or positively. Your education on personal finance, economics, and how the world works greatly change your perceptions on money. Politics can influence you greatly. If you believe that all money is created through exploitation then you will think differently than someone who believes creating something of value provides benefits for members of that society.

Also some advice that is correct for the poor would be bad advice for those richer. Cutting coupons to save a few dollars may be a good use of time those with little income, while working more doing something more specialized might be better for those with higher incomes.

Generational values and world events have a huge effect on how you view money. If you have every met someone who lived through the depression then you will quickly realize that they waste very little because they have survived with almost nothing. They have seen hunger, mile long lines for free soup, and things we would normally throw away reused until in tatters. Some other view things to consider are sex or gender, nationality, religion, and culture.

In short, there are a plethora of reasons not to talk about money and reasons why it is weird to discuss. Knowing where you are and not knowing the good and bad consequences of your actions should push us out of our comfort zone to read more, reflect more, and talk more. Knowing the consequence of saving an extra $100/month in your retirement, waiting to start investing, or whether to buy the new car instead vs the slightly used one. There are reasons to do and not do all of the previous examples given your circumstances.

I was listening to a podcast a couple of weeks ago and the gentlemen being interviewed said that the common person thinks personal finance is 90% math and 10% everything else. After spending a lot of time reflecting on personal finance, I think it more appropriate to say personal finance is 10% math, 20% rules and tax laws, and 70% psychology. Don’t misunderstand me; compounding interest is a an extremely important concept to constantly reflect on. Every time I delve into the compounding of numbers I come out the other side with a sense of awe of how powerful and absolutely life changing it can be. However, if you have a psychological hangup with money, then no increase in salary or magic windfall will save you. Look at all the lottery winners who end up in a worse financial place a few years later than before they won the big prize.

This brings me to one of the more interesting and important psychological concepts to understand and it is deeply seated in everyone’s psychology; the scarcity mindset. In Kristy Shen’s Book, Quit Like a Millionaire, she calls her scarcity mindset her super power for building wealth. Shen grew up in China in extreme poverty. She explains how the national average wage in china was $327 per person. This is a less than $1 a day. For fun she scavenged medical waste heaps for things she could turn into toys because there was no chance her family could buy her any real toys. When her family relocated to Canada her previous forced scarcity allowed her to remove any shred of “invisible waste” from her life and be able to reach an extreme amount of frugality. She and her husband became millionaires in their early thirties and retired in large part due to her scarcity mindset and frugality, and now constantly travel the world.

This is the type of scarcity mindset I best understand. I have always understood the importance of saving and later learned how to invest, but I have also had medical issues which rendered me unable to work for close to half a year and left me with medical collections calling and my emergency fund depleted. That experience will probably make me save and keep more than others in my emergency fund and brokerage.

Another response to scarcity is to go in the extreme opposite direction; constant buying and hoarding objects. As humans we are working on hundreds of thousands year old mental framework and the early hominid who stored resources and hoarded them might survive a drought or winter that others would not. Today this feature of humans can lead to constantly buying trinkets to get dopamine hits on Amazon and leaving us wondering why we never have any money or financial security.

If scarcity mindset is Shen’s superpower, then I think being content with what I have is mine. Epictetus says “Contentment comes not so much from great wealth as from few wants.“ What I think should also be said is that the only way to become wealthy is to be content with living on less than you earn and investing what we don’t spend. Wealth is also what you do not see. It is the luxury car not purchased and living in the smaller house than you can afford.

However, let us reflect back on scarcity and how it can change our psychology. A central component of scarcity mindset can be decision fatigue. Decision fatigue is the degradation of the quality of your decisions because you simply have too many decisions to make. Jeff Bezos said while he was nearing his retirement that he was really only needed to provide input on a couple of big decisions a week. If you compare that with the lower paying positions in his warehouses who have extreme quotas to meet and thousand of small decisions to make a day, then you can see the extreme contrast. In addition, Bezos has all the paid help in the world to help with his house, family, cars, etc, while the warehouse worker does not.

Due to decision exhaustion of the warehouse worker we can see how they can develop some negative habits which might manifest itself as drinking too much alcohol, retail therapy, eating too much unhealthy food, or smoking. I have been guilty of all those things listed, and I have entirely eliminated most of them from my life or limited them with a better work life balance, lower stress, or medical assistance.

Unfortunately, there is not a simple or easy fix for decision fatigue. Getting a better job whether that is more money, better supervisors, office culture, or a better work life balance has helped me the most. Professional help like therapy can also help you work through complex problems that you haven’t been able to tackle in your life by yourself. Also being humble enough to seek guidance from someone successful or that you respect can point you in a direction you may not see yourself. Lastly, we need to understand that the skills and mentality that saved us through a harsh winter or survive poverty will not necessarily best prepare us and lead us into the next part of our lives. This is also true that worrying constantly about $3 questions when we are past that point financially might lead to decision fatigue and might negatively influence our ability to deal with other $10k questions.

One thing I want to add is that any google search of scarcity mindset or abundance mindset may lead you down a rabbit hole of trying to manifest wealth through some sort of spiritual belief. I don’t agree with this and listening to Jen Sincero, who is one of the proponents of this idea in her book, “You are a Badass at Making Money” was the most frustrating listening experience of my life. If I remember correctly, she spent tens of thousands of dollars to listen to a guru of some sort without knowing where the money was going to come from. I recommend getting your information from books because it is much cheaper or free from the library and vetted by a publisher and editor rather than a self proclaimed guru. Luckily she had forgotten about a 401k (this alone is frustrating) that she was able to cash out (even more frustrating) and pay her bill. She of course felt like it was divine intervention.

Unfortunately, scarcity mindset is caused by scarcity and poverty, and to be blunt it is impossible to manifest a chicken sandwich no matter how hungry you are or need it if it doesn’t exist. The better and more practical option is to devise a plan and follow it.

I feel like this quote can be used in a dozen different ways on a dozen different topics. It is important to show others grace, and it as important to show yourself grace. Regarding finance, the most important part is to start making progress on your finances. Whether that is reducing your debt or increasing your investments; today is the day to start building a habit.

Often nerds like I am can get bogged down in the numbers and have analysis paralysis. They are afraid of making a 95% correct action instead of a 100% correct action that they don’t do anything and lose out on the 95%.

If you are paying off debt just understand that interest rates matter so you need to know them at some point, but if doing that little bit research is going to stop you from paying extra, and start making a dent in your debts, then just pick the smallest debt and pay on it. You may pay a little more interest, but paying off the smallest debt will open up some more room in your budget and provide you an early psychological win.

If you are investing and don’t know where to put your money then find a target date index fund with a low expense ratio. This is a one stop shop great (but not perfect) solution for almost all people. If you can buy this fund in an employer sponsored retirement account or Roth IRA then great. With tax benefited accounts please make sure that you do not make too much money to utilize one and only invest the max amount for that year or it may complicate your taxes.

However, the most important part is getting your money working as early as you can and a couple months later come back and read some more about investing.

You first step doesn’t need to be perfect, but it does need to be taken.

Old age is coming for everyone. One of most common themes in stoicism is welcoming old age. Seneca says, “Let us Cherish and love old age; for it is full of pleasure, if you know how to use it. The best morsel is reserved for last.”

I certainly believe this can be true, but is not true for all or even many today. Unfortunately, very few people prepare for old age. Their bodies are in poor condition from lack of exercise and maintenance of illnesses. They fail to save enough retirement and must depend on their grown children for care and resources. By anticipating the blow of old age we can deflect some of its potency and the earlier we can anticipate and begin preparing for it then the better off we will be. Money compounds exponentially meaning a little attention very early has huge potential later. Your twenties are your most important working decade and your far behind if you are like most people and wait to begin saving and investing until your 30’s, 40’s, or 50’s.

Our old age should be filled with grandchildren, hobbies, and travel. Not working retail when we would rather be doing anything else. Seneca says old age is full of pleasure IF you know how to use it. If you have been active and remained healthy and if I am still financially independent, then like Seneca old age will be “full of pleasure.”

Since the creation of the 24 hour news cycle, they have become incredibly efficient at keeping you glued to the television awaiting the next tragic event that has happened in some corner of the United States. However, when you consider the increase in population, then the world has become much more safer over the decades. However the coverage of tragic events would have you believe the opposite. Due to thousands of years of living in the wild our brains pay more attention to potential danger than potential benefit. What is more attention grabbing: 5 ways you may die tomorrow, or 5 ways that the world is getting better. One of these grabs your attention, while the other almost seems naive. If you fall prey and get drawn in by negativity, then you can find yourself in a downward spiral where you see very little light a the end of the tunnel.

This is one of the reasons you need to be wary of the information you feed your consciousness. Positive thoughts floods your brain with serotonin and dopamine which can rewire the circuitry of your brain. Constant breaking news of robberies and the darkest corners of society can make the world seem worse than it is and influence your perspective.

Having a positive perspective will not only benefit your financial life, but allow you to better persevere through difficult times and difficult markets. For example, a negative event can happen to two different people and they can interpret it completely different. Having the resilience to stay invested and continue to invest new money makes the difference between being left on the side of the road and persevering until things get better and making it to the finish.

Their are a plethora of investment products on the market and with the most complex then the people selling you them often do not understand them. The advisors just understand that they get the biggest paychecks with increasingly complex products. Also, often people are understandably overwhelmed by the vast amounts of complex invest options. However, the best products are the simplest to understand and often the increasing complexity of investments hides the ever increasing fees where the real money is made for the brokerages and investment advisors. If you cannot explain an investment product in a sentence or two without a dictionary then you are probably overpaying and underperforming.

Index funds are extremely simple and easy to understand. When you are buying an index fund you have relinquished the false idea that you can predict the future, and are rightfully saying “I just want my fair share of the stock market. that the index represents.”

Interestingly this is not only the easiest and cheapest way to invest; it is also the best.

Rick Ferri had an excellent presentation which I will briefly summarize. There are three stages to your journey as a Boglehead. You understand the importance and power of investing and index funds. The second stage is that you make it complex by trying to get an extra percent based on this factor or that factor or with this technique or that technique. The last stage is simplification. This is the stage when you return back to the first stage in a way and realize that the hours you spend everyday trying to maximize returns is wasting time and hurting your returns.

There is something novel with the human mind in how we think everything must be predictable or controllable. However on Morgan Housel’s collaborative blog, one of his articles can be summarized as saying that investing is a negative art. The less you tinker with it and think about it then the better you will do. Much of the rest of the world doesn’t work like this and it is counter-intuitive. Can you imagine a world where not playing a sport made you better at it or not writing made you a better writer, but in many ways this is how investing works for most people.

The only thing guaranteed with the stock market is volatility including both ups and downs. For some reason, I enjoy checking on my funds daily. I remember reading a Fidelity Study that one group of people who have above average returns in the market are the deceased. You read that right; the dead are excellent investors and it is because they are unable to change their allocations. In the same study, another group who outperformed were people who forgot they had accounts. Weathering the ups and downs of the market and not jumping in and out of the market is the best way to come ahead.

One mental trick I play on myself to weather the storm of volatility is to be happy whether markets are up or down. If markets are up over the last few months, then look how much money I have. That is a great feeling.

The other market direction is downward. To be happy when the market is going downward requires a little more knowledge of the market. First the market cannot grow forever upward. “Trees do not grow all the way to the sky” is a common saying by distressed debt investor Howard Marks. At some point if stocks are inflated, then they will return to the mean. Business’ can only grow so fast and eventually expectations will outgrow real growth.. When this happens then stocks will eventually snap back to be based on the companies that they represent. Therefore, if you are constantly buying you should welcome pullbacks and recessions because it allows you to buy the company at a cheaper price.

Think of an asset you own, possibly a house or a car. If someone comes a tries to buy one of those for half the price they are worth, then you would surely refuse their offer and wait until prices rebounded.

Think of stocks in a similar way. When you are buying them then hope the bottom falls out and hopefully you can hold for decades in the future when their value will be a multiple of its current price.

Taxes are a big cost, but takes priority after getting your spending in control and learning about index funds. You want to pay all the taxes that you owe, but you need to take advantage of all tax advantaged accounts.

401k and 401k equivalents delay paying taxes which allows your full amount of money earned to continue to grow until you take it out of the account.

One advantage for people but especially those retiring early is that once you quit your day job then you can control how much you are taxed by how much you withdraw from the account. Income taxes generally are at different tiers and the more you make then the more are taxed at the higher tiers. Therefore, it important to spread out how much you withdraw year to year.

Roth accounts are funded with taxed dollars and the funds grows tax free and when you withdraw them then you can do so tax free. We talked briefly about them in a previous post titled “Roth IRA’s; Available to Almost All and an Extremely Powerful and Important Tool.”

Its important to understand the differences of Roth IRA’s and traditional retirements tools and it is best to use a little of both to control how much you are taxed in any year.

Hypothetical Mary needs 50k to live on a year. If federal taxes increases dramatically after 40k then Mary should withdraw 40k from her regular 401k and the rest from her Roth account. Doing this she will only be taxed on her initial 40k and stay at the lower amount.

Another thing to keep in mind is that it is almost always better to delay taxes or grow you money tax free if possible using retirement accounts. Though retirement accounts generally have rules about taking funds out early, some retirement accounts have ways of accessing the money early even if you are young. For example, with a Roth IRA you can withdraw contributions early, but not earnings and with a 401k you can use a strategy called a Roth IRA ladder to access the funds early without penalty.

An index is a list. An index fund is a list of companies that the fund buys blindly. Index funds are the easiest and best investment for several reasons.

First, index funds are extremely low cost. An index fund may have an expense ratio as low as .03%. Some Fidelity funds are free. Unlike most things you buy, most funds take a percentage of the total amount you invest in the fund. For example, someone who cleans your house isn’t paid a percentage of the cost of your house, but in the financial world this is how you pay for your funds. Also because expenses compound negatively they can greatly influence your returns, especially, over a long period of time.

Index funds trade less often the funds that are actively managed. This means they are taxed less which is another way they save you money.

Index funds are an extremely diversified product. There is a saying in the financial world the only free lunch in investing is diversification. With an index fund if Apple is wiped off the world with a meteor, then your returns will be effected but another company will take its place.

Broad U.S. total market based index funds are generally what I recommend.

However not all index funds from all companies are created equal. I recommend index funds from Fidelity, Charles Schwab, and Vanguard. All three are discount brokerages with extremely cheap products.