As I wrote in my review of “Your Money Ratios”, Charles' book sings to me. Charles has the ability to simplify complicated financial topics for the average reader to understand. His book is seriously one of the best books I've read on personal finance in a long while.
One of the keys to progress is learning from experts in their various fields. Charles is gracious enough to answer some follow up questions I've been burning to ask after reading his book. This will be a two part post due to the 2,800 word length of the interview. In part I, we discover Charles' motivation for writing his book, strategies for early retirement, and his conservative and debatable 50%/50% investment split between stocks and bonds. In part II, we discuss the much maligned 401K, personal income taxes, why Social Security will survive, and why the flat tax is the right way to go! Please enjoy!
WRITING “YOUR MONEY RATIOS”
Question: Was there a particular lightning bolt reason why you decided to write this book? For aspiring authors, what suggestions do you have to get your worked published in this ultra competitive field of business?
Answer: I wanted to write a book that would help average readers understand the most fundamental and critical relationships among one's income, capital and debt, and how those things must be managed throughout your working career to build financial independence. So I took what are often quite complicated topics and figured out a way to present them in a very simple format that anyone can follow. I would like more people to enjoy the benefits of financial independence, and I hope this book does that.
As far as writing, all I can say is write about what you believe in. Hopefully, if you believe in it strongly enough, you'll develop some expertise and then seek out ways to spread your ideas. Try to develop some niche that is reflective of your expertise. So I developed the ratios and they came out of my background in tax, finance and also working with individuals.
Think about what you do that is a little different and try to focus on that unique nature of what you do. It is a tough slog because the field is very crowded and often the least valuable information gets the most press. But you have to accept that reality and still push ahead. And then you need a little luck. Your message has to somehow get into the hands of people who appreciate and understand it. And that is hard to predict, which means you need a little luck to get it out there. So if you are going to pursue that path, I think you need to accept those realities of the marketplace.
Question: There seems to be a big movement among the Gen Y crowd to “retire” earlier, rather than the traditional age of 60-65. For those who wish to retire by 45, what would you suggest their Capital To Income Ratio target be, as well as thoughts on getting into mortgage debt?
Answer: Retiring early is a great goal, and if you want to do so, here are some things to consider: Because you won't qualify for a social security benefit at that age (and won't accrue the maximum benefit as you are not working through age 65) and you won't have medical coverage through medicare, you would need to bump up your CI Ratio to at least 16, which at a 5% distribution gets you to 80% income replacement at that age. But the math on those numbers is pretty tough. In your mid 40s, you've probably only been working for 20 years or so. Thus, it would be difficult to accumulate savings of 16 times pay after only 20 years of work once you factor in taxes. But if you have some sort of windfall event, like selling a business, getting fortunate with stock options, or an inheritance, then that would help.
Also, with respect to a mortgage, once you want to live off the returns on your financial assets (retire), you really need to be debt free. I can't stress how important that is. Thus, by the time you stop working, you want to be out of debt. But, that doesn't mean you should be a renter, because if you rent you are paying a “deemed” mortgage, meaning the mortgage of your landlord, and your rent will continue to go up year after year, so you never have a rent free place to live. Thus, if you want to retire early, you may need a mortgage to buy your house and then you need to work hard to get it paid off by your early retirement date.
Question: I have a fear that once I get to retirement, I'll ask myself “Now what?” and “Is this all there is?” In other words, I'm fearful that retirement isn't as fun as the journey to retirement. What are your thoughts, and are these fears irrational?
Answer. I think you are correct to be concerned about “now what.” You have to think of retirement as another phase of your life; one where the returns on your capital give you freedom to do things that maybe you couldn't do when you didn't have financial independence. Think about what you enjoy doing and who you enjoy working with or spending time with, and allow the returns on your capital to facilitate more of that lifestyle.
Question: Do you think some people choose to not really care about their retirement? Perhaps those who retire with nothing are actually the luckiest people on earth? They were able to live life to the fullest for 40 years after college, and spend everything they earned. Using an extreme example, Bernie Madoff lived a life way beyond his wildest dreams. At 75 years old, an in prison, who really wins? Some would argue Bernie.
Answer: Yes, I think there are many people who just simply don't want to plan. Some will get lucky and may do alright even if they don't plan, just like somebody wins the lottery every week. But most who do not plan will experience lots of economic hardship as they age. And you just have to ask whether you want to run that risk.
Question: You suggest keeping a fixed Investment Ratio of 50% stocks, 50% bonds from ages 25-59, and to 40% stocks and 60% bonds ages 60 and beyond. A number of readers, myself included wonder whether this is too conservative? Would your advice have changed if you wrote the book before the crash of 2008-2009?
Answer: I have always been a big advocate of balanced investing, meaning a split of your money between diversified stocks and very high quality fixed income holdings. I wrote the book before the recent market declines, it's just that it takes awhile to get things published. The 2008 to 2009 decline just helped emphasize my point. So I have always pushed investors to adopt this approach.
Think about it this way, when you invest in stocks, your return is uncertain. There are no guarantees and past performance is not indicative of future returns (you've seen that warning before). And there are periods in modern markets where returns are negative for 20 or more years, Japan for example. So you can't ignore that possibility. Now couple that with the fact that you will only live one historical cycle in the markets.
If you get stuck in a bad cycle, you may end up saving for 30 years and not have much to show for it. So I like to have a plan B, which is the interest return you get from fixed income investing. I lay this out in the book and go through the theory of why I think it's important to have a plan B. And the amount in fixed income needs to be sufficient enough to make a difference, and 50% is, which is why I suggest people consider that type of allocation.
Basically, the interest payments from bonds serve to balance out the uncertainty of investing in stocks. And I think you need to build a base in high quality fixed income to allow you to invest and take the risk in equities.
But of course, every person needs to decide for him or herself how much risk they want to take. My feeling is that investors have been warned multiple times about the potential longer term risks of investing in stocks, and if they choose to ignore the warning, then they do so at their own peril.
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Update for 2019 and beyond.