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August 25, 2018

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Thoughts From a 73-Year-Old

November 25, 2017

This week’s blog post introduces us to a new series on Financial Fixation, the “Thoughts from” series. “Thoughts from” will feature an interview with a unique individual who will detail their thoughts on personal finance, the retirement industry, and their own journey towards retirement. We will feature people of all different ages to get different perspectives on the various topics and to see what matters most to people at different ages. Starting with a current retiree, we will work our way to the younger generations, finishing with someone who is relatively new to the workforce and retirement planning altogether.

 

Earlier this week I had the pleasure of interviewing Jake, a 73-year-old who was able to retire early from his day-job. I wanted to better understand the challenges that people his age experienced during their working lives as well as during their retirement. I also wanted to understand how he went about saving and investing for retirement.

 

Background

 

Jake grew up in downtown Detroit and later made the move with his family to the suburbs. He worked part-time to put himself through college at Wayne State University. After college he worked within accounting as an auditor for a mid-sized city in the midwest.

 

Interview

 

Financial Fixation: So how old were you when you retired from your dayjob?

 

Jake: I was 58 years old when I retired from my job with the city, but I still had several jobs on the side.

 

FF: Some people now are calling those side jobs side hustles. What side hustles did you have?

 

Jake: One was a personal tax accounting business. I started with just a handful of clients in my first year and had around 220 clients at the peak.  The second was managing several rental properties, which had about 15 units in total. The third side job was working part-time as a realtor.

 

FF: It sounds like you stayed very busy. What were the major factors that allowed you to retire early?

 

Jake: All of the side hustles, along with a very good pension from the city.

 

FF: Can you elaborate on how the pension works?

 

Jake: Well, working for the city I received what’s called a fixed income pension. It is based on some formula tied to my salary during the last five years of work for the city. The city will pay x amount per year, which includes medical benefits.

 

FF: Does the pension stay constant throughout retirement or does it fluctuate?

 

Jake: The pension income will increase by 2% every year, mainly to keep up with inflation, for 15 years and then it’s constant.

 

FF: What sources of retirement income do you have now?

 

Jake: Now it’s just the income from the pension along with social security. Up until just a

few years ago, however, I had income from all of the “side hustles” mentioned earlier.

 

FF: The retirement industry has changed dramatically in the last thirty years, do you think it’s allowing the average person to fare better or worse during retirement?

 

Jake: The average person now has it worse off because employers have completely gotten away from the fixed retirement amount every year. The 401(k) has replaced the traditional pension and it puts the risk with the employee rather than with the employer.

 

FF: You mention risk, is there any risk with the pension income that you have not coming in?

 

Jake: Extremely low amounts of risk. I’m fortunate that my pension was well funded by the city. There are companies out there though that have had issues paying their pension benefits.

 

FF: What advice would you give to someone just graduating college today who is hoping to retire early?

 

Jake: Don’t. It’s boring. But if you really want to, get multiple part-time jobs so you have multiple income streams to help you save up.

 

FF: Many people believe that once you hit a savings goal of 25 times your annual expenses that you can safely retire, do you agree with this logic?

 

Jake: Yes and no. You need a combination of savings, no debt, and a pension. Not a traditional pension, but some sort of pension replica. You need that steady cashflow. The short answer though is no, mostly due to inflation. Nobody knows how prices will fluctuate in the future. My recommendation would be that once you hit your saving's target focus more on enjoyable, part-time work. When you have a good-sized savings, you aren’t thinking of work strictly for the money. It tends to work better for both parties, the employee and employer. Part-time work can also turn into full-time work if you really like it.

 

FF: Some people in their 20s and 30s are cutting expenses to the bone, with the expectation that they can keep costs low throughout their lives, do you think this is a viable way to try to achieve financial freedom?

 

Jake: No. You should live comfortably. To make things work out, do the things listed above. Rather than cut expenses, try to increase your income. That way you can still do things that you enjoy in life rather than sitting around trying to just keep expenses low.

 

FF: Looking at where the stock market and real estate markets are at now, do you think these are good long-term investments for younger generations trying to reach financial independence?

 

Jake: Yes, real estate for both investments and rentals. One rental building actually allowed my wife and I to put our three children through college by itself. We were writing checks directly from that property’s account to the university. It was tremendous. With rental property, my advice would be to live close to your buildings and manage the units yourself. You can choose to pay a property manager to handle everything, but you’ll lose 10-20% of the income right off the bat. Another tip would be to try to break even initially, then work on paying down the principal and building up equity.

 

Jake: The stock market should also be good for long-term investments. Try to stay diversified by looking for good mutual funds with a proven track record.

 

FF: How about an ETF instead?

 

Jake: A who?

 

FF: ETF, Exchange Traded Fund, similar to a mutual fund but a little less actively managed. Expenses are much lower than mutual funds.

 

Jake: Yeah that would work too. Remember though that some mutual funds with a good track record can outperform the general market.

 

FF: Yeah, that is important to remember. Some people only look at the expense ratio when choosing funds. How about buying into individual stocks? Or speculating?

 

Jake: For long-term investing you don’t want to speculate too much. Try to avoid this except for smaller amounts of your portfolio, probably no more than 5%.

 

FF: If you had to choose just one to invest in long-term, stocks or real estate, what would you choose?

 

Jake: Real estate. Now this doesn’t mean the home that you live in. I mean buying real estate to then rent out.

 

FF: That’s good advice. Any other advice for younger generations?

 

Jake: When you retire, have no debt whatsoever. Have your mortgage fully paid off. Have your medical benefits lined up. Medicare is a plus, make sure you’ll be eligible for this.

 

Jake: Another tip is to never borrow to invest in the stock market. Buying stocks on margin isn’t wise and I’ll reiterate that speculation should be minimal.

 

FF: Should younger people always try to buy their house?

 

Jake: Yes, but never beyond their means. Building equity is important but it also depends on how long they plan on being in the same place. So, it doesn’t always make sense.

 

FF: You’ve been through a recession or two – how will the next one start?

 

Jake: Believe it or not I think it will be from real estate again.

 

FF: If so, hopefully it’s not as bad as the last one. Final question, do you think the average person is savvy enough to manage their finances and plan for a comfortable retirement?

 

Jake: No, I don’t think the average person is financially savvy enough to do all of that. Every individual now has the responsibility to learn what they need to. There are many people out there offering to help, the problem is that there is almost always an ulterior motive. These advertisements that you see everywhere are trying to get people to save money with them, all so that they can collect fees on your investments. It’s not like it was 20 or 30 years ago. I’d be worried if I was your age.

After speaking with Jake, one thing immediately became clear, the comfortable retirement that so many people are after is only possible through years of tremendous hard work and planning. It was not something that was going to just “happen” on its own.  As Jake proved, the side hustles were really what helped him get ahead and stay ahead. It seems as though too many people are just expecting the comfortable retirement to happen, rather than working hard to achieve it.

 

I am excited to move forward with this series and see what people of other ages have to say.

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