As noted last week in my MoneySense Financial Independence blog, I intend to write a series of posts on the mass migration of almost-retired baby boomers moving from large corporations to free agency.
I recently attended a full-day workshop on this topic put on by Mark Venning of ChangeRangers.com. Venning knows well of what he speaks: He has spent more than a decade and a half working with mature (55+ generally) clients who have migrated from corporate employment to self-employment. A big part of his perspective is extended life expectancy and longevity: he prepares clients to continue working at some level well into their 60s, 70s and even 80s. The slogan on his business card and website is Envision the Promise of Longevity.
Claiming your place at the fire
As I argued on the MoneySense blog, 40 years is a long time to go without a paycheque, which is how long someone leaving the paid workforce might have to plan for if they leave paid employment in their early 60s. Add the type of extended longevity that Venning and others envisage (I’m thinking of Lee Anne Davies and her Agenomics blog, or Moses Znaimer of Zoomer Media), and “retired” boomers need to start preparing for this next great stage of their lives. There are of course many books on this topic: we looked at one last week and another I’m currently reading on my Kindle is Claiming Your Place at the Fire: Living the Second Half of Your Life on Purpose.
Leaving the Corporate Womb
But back to Mark Venning and Change Rangers. I can’t possibly summarize his content in a short blog but suffice it to say that in this economy there are many talented people who are either voluntarily or involuntarily being motivated to consider alternatives to employment in large corporations. One is self-employment, an option that “more and more people 50+ are exploring,” he says.
Compared to 50 years ago, these mature people are in better physical condition, so can expect an extended lifetime. “They’re living longer than they typically used to so they have to plan for a longer period of time,” he told me in an interview, “This is why the word ‘Retirement’ doesn’t work for me. It’s about longevity planning. My core message is plan for your longevity, not for retirement.”
A Portfolio Career
As I see it, there are at least three ways to go when you decide to set up your own shop. One, you may see this as an opportunity to test out clients (and them you) with a view to possible full-time reemployment down the road. Second, you may decide such a “portfolio career” is a more attractive route at this stage of life: when you think about it, a single “job” means just a single client, which is less secure than having several clients. And of course, you don’t have a traditional “boss,” although being your own boss has challenges of its own. And third, while many choose to start such enterprises tentatively as a one-person shop working from a home office, there’s always the possibility of growing the enterprise down the road so that one day you are an emploYER, rather than an emploYEE. And that in turn offers the potential to sell a business.
Free Agent Nation and other books
As I warned, this blog doesn’t even begin to scratch the surface but for now, I’ll leave you with a few book suggestions from a list Venning hands out. One I just read on the Kindle is Dan Pink’s Free Agent Nation: The Future of Working for Yourself. Another I’ve just begun is Peter Block’s Flawless Consulting: a Guide to Getting Your Expertise Used. And a third I’ve put on hold at the library is Alan Weiss’s Value-Based Fees: How to Charge and Get What You’re Worth.
As my parallel Financial Independence blog at MoneySense.ca shows here, there are degrees of financial independence. For one-stop-shopping purposes for users of this site, I’ve included the blog below:
Degrees of Financial Independence
In researching the web for content clarifying the differences between Retirement and Financial Independence, I came across this May 8, 2014 post by J.D. Roth, of the Get Rich Slowly site.
In his “coming to terms” post, Roth finds the traditional word Retirement carries too much baggage, so he prefers the term I also like: Financial Independence. That’s a fairly common stance among the semi-retired and early retirees who write about this topic: the only difference is few have (as yet) adopted my contraction of Financial Independence: Findependence. The reason I invented that term is that I felt if we are to have a catchy popular alternative to the word Retirement, it should be shorter than the two-word seven-syllable mouthful called Financial Independence. Retirement is one word and three syllables; Findependence is also one word and has only four syllables.
A continuum of financial freedom
But whatever the term you prefer, it’s important to realize there are degrees of Findependence/Retirement, or a continuum. This is a point Roth makes in the article flagged above. He talks about four types of retirement: the traditional full-stop version that begins (usually) at age 65, Early Retirement (launched usually in one’s mid 50s or early 60s, although there is a genre of Extreme Early Retirement that supposedly begins in one’s 20s or 30s). And finally there’s the concept of multiple Mini-Retirements championed by Tim Ferriss in The 4-Hour Workweek, and which I blogged on earlier this summer.
If you reframe the Retirement discussion as being about Findependence, it’s also possible to describe a similar continuum, just as it’s possible to describe different degrees of financial freedom. Roth notes we all begin life completely dependent on our parents, including financially. At some point, children leave the nest but will depend on an employer and/or financial institutions. Once free of consumer debt, a greater degree of financial freedom is achieved, and this freedom expands once you own a home free and clear: which is why I say the foundation of Financial Independence is a paid-for home. At that point, you are no longer paying a mortgage or paying rent to a landlord, although of course you will still have to pay municipal property taxes and if you’re a condo owner you may be on the hook for ongoing maintenance fees. Beyond that, you’ll still need external sources of income for heating, hydro, roof repairs and all the other expenses that home owners incur. And finally, true Findependence arrives (I call this Findependence Day), when enough money is coming in from multiple passive sources of income (Pensions, investments, etc.) that you no longer need to rely soley on income derived from the single source called an “employer.”
Cadillac vs Chevy retirements
But even then, there’s low-level Findependence and high-level Findependence. You may have saved enough not to have to go to work five days a week but may not be so flush that you can eat in fancy restaurants and travel the world 365 days a year. Most people on the Findependence continuum will be somewhere between the latter luxury Findependence and a barebones one that requires eating in most days and restricting exotic travel to a few weeks a year. If the latter, it’s perfectly logical to continue to work on projects or part-time to fund a few more luxuries and the occasional mega-trip.
The illustration is from the cover of Stephen Pollan’s 2003 book, Second Acts, which I got from the local library. (Frugality guerrillas may like my tip here: download a free sample from Kindle, read the intro, then place a hold on the web site of your local library. This way you get a bit of instant gratification, but you also save money.)
Sidebars of famous Second Acts
One of the nice features of this book is dozens of sidebars where the authors (Mark Levine is also credited) highlights such famous second acts as Ray Kroc, Jimmy Carter, Paul Gauguin, Ronald Reagan, J.K. Rowling and many more.
Pollan himself has had a major second act as a life coach, following a stressful corporate career which ended with the good news that he had tuberculosis. Yes, good news, because the alternative diagnosis was lung cancer.
A focus of the book is written exercises designed to help readers uncover the life of their dreams, putting that dream into words, developing a “second act mindset” and identifying the blockages (or “closed doors”) that prevented actualizing dreams during the long “first act” so many have settled for.
Chief among the doors that have to be pushed open are age and money. Many convince themselves they are “too old” to embark on a second act, or that they require staggering sums of money to pull it off. Another concern is often “duration.” If the prelude to a second act is going back to school or otherwise paying your dues in a profession like acting, then the number of years it will take to make the transition can weigh on those who are already approaching their golden years.
In some cases, we are own worst enemies: for some, fear of success prevents people from pursuing their dreams, for others it’s the opposite: fear of failure. Sometimes, we convince ourselves that we can’t proceed without the consent of close family members. Pollan and Levine also devote a chapter to physical health and appearance, urging readers to do whatever it takes to realize their dreams: if that means losing 50 pounds, then get out there and diet and exercise; if it takes cosmetic surgery to enter a field that puts a premium on youth and beauty, then do it.
As noted by Richard Eisenberg at Forbes.com (here) and NextAvenue.org, I recently made my personal “Declaration of Findependence.” As he noted, July 4th seems to be as good a day to make such a declaration as any other.
It’s been about six weeks since my Findependence became official, although as I confessed to Richard, the timing wasn’t 100% what I would have chosen. As things are working out, however, I actually have a head start on my most recently amended Findependence Day: which I’d planned for next April, when I turn 62 and start to draw modest pensions from my 19 years at the Financial Post and a few shorter-lived corporate gigs.
A moving line in the sand
There’s a scene in the book (both Canadian and US editions) where I talk about the power of “drawing a line in the sand” about your Findependence Day. I do, however, note that it often turns out to be a moving target. External circumstances are as apt to move the date forward as backward.
If stock markets are doing well, as they are now, you can move the date ahead in time. As I told Forbes.com, I viewed my April purchase of a new Camry Hybrid car as an exercise in “rebalancing.” Pictured is the old Volvo S70 it replaced, and which was featured once in an article I wrote for the National Post. Taking some profits on stocks and paying cash for a new car puts a solid tangible asset at your disposal: and I’ve found it a very pleasant and useful addition to my Findependent life, however fond I was of the old Volvo.
Another way your Findependence Day can be moved forward is if circumstances at work change. These days, the economy is such that if a major corporate restructuring occurs or a new boss comes in to leave their mark, your financial independence may arrive sooner than you think, and perhaps slightly scaled down from a higher level of Findependence down the road.
But that’s the whole point of Findependence and having a reserve emergency fund: you hope for the best but prepare for the worst. As long as you’re debt-free and your investment and pension income exceeds your income from salaried employment, you’re ready for whatever the corporate world will throw at you.
The ultimate boss is yourself
As for what Findependence has been like in practice, in truth it very much resembles the four-year period I spent as a freelance technology writer in the 1980s. The commute is a lot better although lacking a “buffer zone” to read in or listen to audio books, news or music. You still have to discipline yourself to put in the morning’s “two hours of real work,” as per the earlier blog here on the four-day. And of course, you have to promise yourself to do the same for the two-hour “afternoon shift.”
During the first six weeks, my daughter — now in Ireland — was around the house observing the transition. I joked about what it was like having an unemployed bum hanging about the house. She was having none of it. “You’re self-employed, Dad,” she reminded me. End of conversation.
Next time (on July 1st and in time for July 4th), we’ll look at how to declare YOUR Findependence Day.
Last time, we looked at the concept of The 4-Hour Workweek, which is also the title of a book by Timothy Ferris.
How realistic is the 4-hour workweek, which Ferriss equates to the mobile lifestyles of what he terms the “New Rich,”? Well if you’re semi retired, four hours a week of productive work is four hours more a week productivity than the traditional full-stop retirement.
Precursor to 4-hour week from the 1950s
What I find curious about Ferriss’s four-hour a week concept is that it resembles in some respects a much older strategy called the four-hour day. In the 1950s, William J. Reilly wrote a book called How to Make Your Living in Four Hours a Day (without feeling guilty about it). (Harper & Bros. NY 1955). Note the subtitle!
I wrote about this a few times in my old Wealthy Boomer column in the Financial Post prior to joining MoneySense, including one in June 1997. In fact, most of my time in the paid workforce has used some variant of the four-hour day. Ironically, the person who flagged me to Reilly’s book in the first place was a former boss and still friend, Norman Evans, who took the photo of me in last week’s post. Even though he was my employer at the time, and presumably seeking maximum productivity from me, he was serious about me using the four-hour day.
Two two-hour stints focused on what you’re really paid for
The idea of the four-hour day is that very highly creative people like composers, novelists or even high-level executives, really have only four or five hours of high-level mental daily energy to perform the tasks they have to do. As any office cubicle dweller can tell you, very few people do a high-energy 8 hour day for every hour they’re on the job. For senior managers and creative types, what’s important is the high-level brain power being expended: not the amount of time one’s bum adheres to an office chair.
So it’s important, whether you’re a salesperson, executive, artist, musician or writer to spend at least two hours of the workday morning doing the work you’re really paid for: making cold calls or closing deals if you’re in sales, writing articles if you’re a writer, writing a symphony if you’re a composer, etc.
Having done your two-hour morning stint, you’re free to spend two hours over lunch networking, learning or exercising, as long as you promise yourself to spend at least two hours in the afternoon doing the work you’re really paid to do. In the case of former boss Norman, he often espoused using the two-hour interregnum between the two two-hour work stints for “killing two birds with one stone” concepts like walking meetings.
A corporate compromise: a 4-hour day tucked inside an 8-hour day
As an example, imagine your morning shift of “real work” is between 10 am and noon, and the afternoon shift between 2 and 4 pm involves being back at the desk making sales calls, editing or writing, budgeting or whatever. Note that this leaves an hour first thing for doing things like reading the paper, checking email or social media, and the same at the end of the day. Even when I was a newspaper columnist, I practiced a version of this. As an editor, it was trickier. Because at a large corporation like Rogers there are many meetings and interruptions, with staff continually poking their heads in for impromptu meetings.
True, my official hours at MoneySense were more like 9 am to 6 pm, with a one-hour commute tacked on both ends, but within that nine hours was an inner core of two hours in the morning and two hours in the afternoon.
The 4-hour workweek more aligned with Findependence
Admittedly, the 4-hour Work WEEK espoused by Ferriss is a quantum leap of difference: he’s really pushing the envelope with a four-hour workweek. If it works, I’ll revisit his strategy in future versions of this blog but right now, I’m inclined to view findependence as more compatible with a 4-hour work WEEK, and the four-hour DAY as more compatible with salaried corporate employment: even if it’s the variant I describe that requires being there physically at the start and end of the normal office 9-to-5 day.
The Mexican fisherman: working to live or vice versa?
Before closing, I should note that our friend the Mexican fisherman also makes an appearance in Ferriss’s book. This was of course the subject of my current Financial Independence column in the new Summer issue of MoneySense. As I noted there, the Mexican fisherman story is all over the internet and I wrote the piece before I even read Ferriss’s book, but it does indicate the general theme of living in the present, and the folly of forever “slaving and saving” today for the mirage of a single one-time-and-forever “Retirement” in the far-off future. (All on the assumption that employers, pension managers, financial markets, health, spouses and family cooperate.)
As John Lennon famously wrote in what turned out to be his final album, “Life is what happens to you while you’re busy making other plans.” I can relate to that, especially this summer, but also firmly believe that if Life hands you an unexpected “Plan B,” the B stands for Better!, as best-selling spiritual author Joyce Meyer argues in her book, You Can Begin Again.
Next time, we’ll also look at the notion of “Second Acts.”
Here’s a new concept I’d not considered until I started reading the book pictured in the adjacent photo. Last time, we talked about semi-retirement and sabbaticcals but you might want to add the term “mini-retirement” to all these concepts that (in my view) touch on financial independence.
In his book, The 4-hour Workweek, Timothy Ferriss floats the idea of periodic mini-retirements spread over a lifetime. So instead of the traditional route so many of us take – which he dubs “slave/save/retire” — Ferriss likes to work in two-month stints, then “retire” for blocks of a month or so (sometimes longer).
Death of Vacations?
Now you might argue that the traditional two-week annual vacation squeezed between 48 to 50 weeks of working is a mini retirement, or more accurately, a “Micro retirement.” But of course the very fact of you having a return ticket means a micro retirement is no retirement at all.
Even as he declares the birth of Mini-Retirements, Ferriss announces the “death of vacations.” He discovered mini-vacations after being “miserable and overworked” early in 2004. He originally planned to relax for a month in Central America but, seeing as he had only purchased a one-way ticket, extended his stay for three months and ultimately 15 months. Thus came the insight that semi-retiring baby boomers may well want to embrace: “Why not take the usual 20-30-year retirement, and redistribute it throughout life instead of saving it all for the end?”
An end, I might add, that might not be as hale and hearty as mini-retirements taken earlier. As I say in my book, the goal is to enjoy Findependence “while you’re still young enough to enjoy it.”
Alternating waves of activity and leisure
The flipside of the mini-retirement strategy is that it also means those practicing it – many of them the oncoming wave of retiring baby boomers – will actually continue to work: as I said last time, probably well into one’s 70s, health permitting.
The difference is that this will be accomplished in alternating waves of activity and leisure. This actually also corresponds to my confession a week ago that I had a few early false alarms on my own Findependence Day. Now that I’m refining the concept, I realize that you can have multiple Findependence Days, each associated with separate and finite “Mini-Retirements.” Now that the World Cup has begun, I’m hoping to have one this summer.
Embracing the Mobile Lifestyle
A big ingredient in Ferriss’s approach is the mobile lifestyle, which is implied by the book’s subtitle: “Escape 9-5, Live Anywhere and Join the New Rich.” It’s harder for salaried 9-to-5ers to embrace this lifestyle, since it’s more suited to self-employment and a web-based mobile device culture. But even for what Ferriss terms “cubicle dwellers” there are ways to pull it off if you can negotiate it with your boss.
Next time, we’ll look at the idea of the four-hour work DAY for employees: a precursor to the four-hour work WEEK.
I’m addressing this edition of the blog to MoneySense readers, who may have learned of this web site’s existence because of a gracious mention in the editor’s note of the new Summer issue of MoneySense, penned by Duncan Hood, who both preceded and followed me in the position of editor-in-chief.
The above picture, taken this morning, you could call “View from the Editor-at-Large’s chair.”
As Duncan implies at the end of his editorial, it turns out my personal Findependence Day (or Financial Independence Day) was May 20, 2014, my last day as a full-time employee at Rogers Publishing. The concept of Findependence and Findependence Day can be found in chapter one of the financial novel of the same name, and which is the chief focus of this blog and website. The introductory chapter is free and you can find it by clicking on the Preview tab of this site, or here.
At one point in the book, I say that the day after Findependence Day may be just like the one before it, except that from this moment on you work because you want to, not because you have to. Right now, I neither have to nor want to, so I’m declaring this summer a sabbatical. After 35 consecutive years in journalism, with never more than two weeks off in a row, it’s a long-awaited chance to do a lot of reading and thinking and exploring new opportunities.
Is Semi-Retirement the best of all worlds?
Some of the books I’ve been reading are What Color is Your Parachute? For Retirement; Mitch Anthony’s The New Retirementality; Ian Taylor’s Are you ready for Semi-Retirement? and others I’ll mention in future posts. I believe most baby boomers have a lot of life ahead of them and this 61-year old (a 1953 model, as one friend puts it) intends to be fully engaged in writing, editing, speaking, blogging, book authorship, social media, reviewing books, consulting and other activities, probably until well past 70. Once they’re findependent many boomers will still want to be actively mixing a work lifestyle with a bit more leisure and learning: See The Three Boxes of Life, a book I read decades ago. Unless you’re completely burned out by a stressful career, many of us will be in “go-go” mode for the early to mid 60s. This may become “slow-go” as you pass 65 and ultimately “No-go,” which might occur as one enters true old age and are disabled or suffering early signs of dementia: or forced to take care of a partner in that condition.
As corporate full-time salaried jobs go, the editorship of MoneySense was hard to beat. So I doubt I’ll even try to replace it: instead, I’ll probably choose to implement a “portfolio career,” the chief elements of which I mention above. Of course, if another perfect job arrived, I’d certainly consider it!
Unpacking the three boxes of life
Back to the three boxes of life. It used to be that Box One was education, devoted 100% to learning. Then you graduated into Box Two: Full-time Work. Probably most readers of MoneySense are familiar with this box, which even in my case has dragged out fully half of the biblically allotted three score and ten. Then Box Three was the traditional Retirement, with 100% leisure, typically occurring at age 65 with a gold watch and the fruits of long service in a Defined Benefit pension plan.
Now what about the timing of your Findependence Day? As a later chapter of the book explains, this can be a moving target and moved forward or backward, depending on financial markets or outside forces beyond your control. You may even have a false alarm or two in declaring exactly when your Findependence actually arrives.
I joke that my liberation in May actually constituted my “third annual Findependence Day.” The first almost occurred when I thought I was going to take a buyout package from the Financial Post. The second was a year ago, when I turned 60 and published the US edition of the book, and celebrated both milestones with what I claimed was “the world’s first Findependence Day party.” (Hey, since I coined the term, I should be able to make that claim!)
Several MoneySense writers attended that event but as I noted at the time in a blog titled “The Day After Findependence Day,” it was a bit of an anticlimax. The following Monday I went back to the office at the Rogers Campus and continued to edit the magazine, content to declare that (as the book says), I was now “working because I want to, not because I have to.”
And I did want to at the time. But I also reasoned that by turning 60, if I no longer enjoyed it I could now collect CPP plus a few modest corporate pensions if I really wanted to. I explained this in the Financial Independence column I wrote in the 15th anniversary issue of MoneySense, which was the last one that I was involved with from the start of the publishing cycle right to the end.
This blog is now column-length itself so I’d better draw it to a close. Up until now, the books and blogs looked at the concept of Findependence Day as something looming in the future. From here on in, I’ll be describing the twists and turns of the actual experience. It’s a bit like the difference between eating food and merely watching someone eat.
I hope to update this blog most Fridays, assuming the spirit moves me and I’m not on some travel adventure to fill up the “Leisure” component of semi-retirement. If you need to reach me, just email email@example.com, or reach out at Linked In or Twitter, where I post as @jonchevreau.
My first interview since the title change:
P.S. Just as I was finishing this blog, I learned of a half-hour podcast with a young blogger with whom I chatted last Sunday. I’ll devote a whole blog to this when I get the chance but in the meantime, this blog (which is also transcribed) constitutes my first media interview since stepping down from MoneySense.
Well, here I am two weeks after becoming the Editor-at-Large for MoneySense magazine. You’ll see this title used often in the media world: typically, as in the case of Financial Post Editor-at-Large Diane Francis, this is sort of a half-way house between full-time employment and a freelance career. In Diane’s case, she still pens a weekly column running in the weekend paper.
In my case, the plan currently is that I will continue to write the Financial Independence column in the print version of the magazine, plus the Financial Independence blog at MoneySense.ca, which may (or may not) be a mirror blog of the blogs you see here at FindependenceDay.com. Frequency yet to be determined. As the Globe & Mail reported on May 22, I have left the editor-in-chief job at MoneySense “but will stay with the magazine as an editor-at-large, focusing more on writing and speaking.”
One young family member I briefed on the difference between the titles was under the impression “At Large” meant some kind of criminal. Not at all! Mostly, however, “at large” means working from home and skipping the two-hour commute I used to have. The photos (above and below) show external and internal views of my new home office: this is much closer to the “Findependent” lifestyle I’d envisaged when I wrote the original edition of Findependence Day in 2008, and to which this website is dedicated.
For those curious about my work methods, I often write the first draft of something outside, then edit and do web formatting inside. For those who heard Preet Banerjee’s podcast with me about the second edition of the book, this is the view of the waterfall he was referring to: I know more than a few who heard that podcast were curious about it. You can find that podcast here or under the Reviews tab elsewhere on this site.
From wealth accumulation to decumulation
I may have telegraphed this subtle change in title in the June issue of the magazine, where in the Financial Independence column I speculate on my eventual plan to start drawing down income from various sources. During his excellent talk celebrating MoneySense’s 15th anniversary in mid May, David Chilton suggested that for baby boomers on the cusp of retirement, the next big theme for older writers like myself will be about drawing down income. This theme is well articulated in Daryl Diamond’s book, Your Retirement Income Blueprint. I’ve provided an endorsement for the new edition of that book going to press, which I was happy to do because I intend to follow much of the blueprint myself as time goes by.
Of course, as I also wrote in the retirement section of the “Best Tips Ever” package, I also believe that the longer you delay collecting pensions (like CPP), the better. I’ve also come to the realization that while I may want to have more flexibility on how I spend my time, and spend less time in transit and meetings, it’s likely I’ll continue to write, edit, speak and consult for the lion’s share of my 60s, and the more revenue coming from those sources, the less traditional retirement income sources need to be tapped.
In any case, I have a 5-year plan that includes the writing of several more books and a few twists and turns in my career that I’ll reveal in this space at the appropriate time. In the meantime, I look forward to being “at large” on various MoneySense assignments and eventually for other media outlets and possibly corporate clients.
Findependence — while you’re still young enough to enjoy it
I’d like to think this will be the best of all worlds, which is what the concept of Findependence is really all about. Remember that the subtitle of the US edition is “How to achieve financial independence …while you’re still young enough to enjoy it.” At 61, I’m no spring chicken but I believe most members of our generation will live to 90 or more, and probably work — at least part-time in “semi-retirement” — until well past 70. See for example the book, The New Retirementality. (Nice title, wish I’d thought of it first!)
When I updated my resume, I was shocked to realize I’ve now been a professional journalist and author for 35 years. Since I’ve always practiced the principles espoused in my columns and the book, I’d hope that young people can be assured that this stuff really works if you stick to the program!
You can also expect me to be updating this blog a little more often than has been the case the last two years. See you in June!
Today’s blog headline (minus the suffix I added) is also the subtitle of a free new investing booklet titled If You Can by William J. Bernstein. This is a terrific and short (16 pages) document that I wholeheartedly recommend be read and absorbed by today’s millennial generation. For that matter, it should be read by just about any investor at any age.
But a warning: if you’re in the financial services industry, you’re not going to like the content. The author is a neurosurgeon who learned the hard way how to invest his own money, and has written a few books along the way. If you’re not in the financial services industry, you may be merely amused by his depiction of most full-service stock brokerages and mutual fund salespeople as the equivalent of “hardened criminals” or “self-deluded monsters.”
At the outset, Bernstein promises to lay out an investment strategy that any 7 year-old could understand and will take just 15 minutes of work per year. Yet he promises it will beat 90% of finance professionals in the long run, but still make you a millionaire over time. The formula will be no surprise to MoneySense readers familiar with the Couch Potato approach to investing in index funds or ETFs. Simply, Bernstein advocates saving 15% of one’s salary starting no later than age 25 into tax-sheltered savings plans (IRA or 401(k) in the U.S., RRSPs or Registered Pension Plans in Canada), and divvying up the money into just three mutual funds: a U.S. total stock market index fund, an international stock market index fund and a U.S. total bond market index fund.
Bernstein a big fan of Vanguard and John Bogle
In Bernstein’s view, the index funds should be supplied by the only financial services company he seems to trust: the Vanguard Group (which sells both index mutual funds and ETFs).
Bernstein is addressing young Americans just embarking on their working careers but the basic idea would apply to Canadian millennials too. Judging by recent Portfolio Makeovers we’ve run showing ETF-based Couch Potato portfolios, the equivalent mix would be 20% each of Canadian, U.S. and international equity index funds or ETFs, and 40% of a bond ETF. And as I’ve written before, don’t even wait till age 25: if you can get your parents to match your savings starting at age 18, the TFSA is the place to put in place these bedrock principals of investing.
And the 15 minutes of work? That would be an annual rebalancing exercise to get the proportions of the three or four funds back to their starting levels.
Millennials can’t count on employer pension plans
Despite this, Bernstein warns younger people that they’ll have a hard go of it because the traditional defined benefit employer pensions of previous generations probably won’t be around much longer. This is pretty much what I wrote in the Editor’s Note for the April issue of MoneySense: that we’re all forced to be our own pension managers these days.
Bernstein says the operative word in his booklet’s title is “If,” because following his simple recipe for wealth (I’d call it financial independence of course) involves a very big “if.” He lays out five hurdles. Number one is excessive spending, second is understanding the basic principles of finance and investing, third is learning and applying market history, fourth is overcoming yourself: the biggest enemy being your face in the mirror; and hurdle five is the conflicted financial industry that is supposedly there to help you with your financial goals. He goes so far as to declare, “The financial services industry wants to make you poor and stupid.” Fighting words, indeed! I might not go that far but it’s certainly a way of looking at the world.
Bernstein’s homework assignments
Bernstein assigns some “homework” to his young readers. They have to read his document twice and read a few books, starting with Thomas Stanley and William Danko’s The Millionaire Next Door and John Bogle’s Common Sense on Mutual Funds. He’s too shrewd to plug his own books but I’ll name one on his behalf that I’ve reviewed positively in the past: The Four Pillars of Investing.
The fact that Bernstein has gone out of his way to give away the booklet should tell you a lot. You can find the link for a PDF here. If you act quickly (today, May 5) you may also be able to get the Kindle version free rather than the 99 cents Amazon.com normally would charge.
To parents of millennials, I’d urge you to download and print this document and hand it over to your kids, perhaps after highlighting the passages you feel to be most relevant. You could give them the link but you know how distracted they tend to be with all the social media noise that abounds these days. Sure, they may say they want to get rich some day but to paraphrase the old saying, “We all want to go to heaven, but no one wants to die first to get there.” For millennials, saving 15% of salary is the financial equivalent of dying, which is why Bernstein titles his document “IF you can.”