Financial Stress Will Kill Us

Plan early, plan now, plan often.

Today's SA for FAs podcast takes a look at the role of stress, specifically financial stress, in shortening our lives via much higher incidences of heart attack and stroke. I would add the idea that financial stress making every other aspect of life more difficult. I have no idea whether financial stress causes a 13X increase in heart attacks as I think I heard Gil, the host of the podcast, say as these types of studies are often cloudy (not a knock on Gil, just not sure how the study was actually done).

It is easy to accept that financial stress makes every other aspect of life more difficult ranging from decisions that need to be made to feeling emotional angst too frequently leading to feeling poorly, physically. The inputs to determining how much money you accumulate include income, growth prospects for income, spending habits, savings rate, investment returns and emotional stability while enduring normal market cyclicality. No pushback if you think of others.

Spending, saving and behavior are likeliest in our control more so than the others. Not that planning wouldn't be crucial but you can start out living below your means as a young adult or evolve into that later, both paths then lead to an increased savings rate. As far a stock market emotion, this can be learned even if it is not easy but we probably all know people who will never come around to realize the next large decline won't actually be different.

We can attempt to influence our incomes in several ways of course but there is an element of this that is beyond your control. If you're making $100,000 at a mid-level in your field, working hard and investing in yourself via education will increase the odds that you level up but someone needs to give you that shot or things have to otherwise work out well.

For many years I've been writing about one-off expenses that can't be budgeted for but that have the potential to derail retirement spending if not at least partially accounted for, like maybe setting aside $1000/mo for things like tires, home repairs or veterinary bills. For folks living close to the edge with a high spending rate relative to income, these sorts of one-offs can lead to going into debt if you don't have $5000 to, for example, re-wire your house.

We have had a challenging year on this front. Earlier in the year we put a roof on our house, we're not sure when it was put on exactly but there were visible signs that it needed to be repaired and we had a bit of a runway for it. Then we had issues with my wife's car, there was a boot issue and we needed to get the serpentine belt replaced which all in was about $2000. That all seems like a lot but there's more, we have a major plumbing issue at our Airbnb that we're getting fixed next week that will be a mid-four figure endeavor.

We have always lived well below our means so the net effect of this is that we will be putting a lot less in my Solo 401k for the year. Having to spend money like that is a bummer but nowhere near the bummer of racking all that up on a credit card.

Another relevant part of this conversation is that when you have a smaller lifestyle to pay for when you retire you put less stress on your portfolio and the number you need from your portfolio is likely to be a smaller percentage of your nest egg. We all know that a 4% withdrawal rate is generally viewed as sustainable, it's not riskless but it is reasonably sustainable. However small the risk of outliving your money at 4%, it is even smaller if you only need 3%. Additionally, the smaller portfolio income need provides flexibility in the face a really big one-off expense.

Financial stress decreases further if you can generate some other income stream beyond your portfolio and Social Security whether it is some sort of passive income or monetized hobby. I've tried to be consistently transparent with our plans for when we reach retirement age. Starting in my late 30's I used to talk in terms of thinking I never wanted to retire. At 53, I have the same sentiment but would phrase it that I can't see a scenario where I would want to retire from managing money. Anything can change at anytime of course but I have been of the same mind on this for a reasonably long time now but I still concede that it will be unlikely that anyone will hire me when I am 80. I can however envision giving up being fire chief at a fairly young age, I am almost eight years in to what I think will be a 15 year tenure.

If things go as I hope, waiting until close to 70 for Social Security (the idea of maxing out my wife's survivor benefit if I die early appeals to me), $1500-$2000/mo in today's dollars from our rental and a modest income by being capable of sticking with my day job to a very old age, then we would need anything from our portfolio to live on. It would be there if needed for one-offs, other emergencies or maybe even travelling.

Having a portfolio that you don't have to rely on would obviously reduce market-inducing stress dramatically. Plan B would be needing to rely on the portfolio a a regular source of income. This is a years in the making plan and it is still evolving. Whatever it is you want to do/prioritize in your planning, even down to how you'll occupy your time, is better started now as opposed to waking up on day one of retirement and saying to yourself, "ok, now what am I going to do."

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