Back on New Year’s Eve I went over to my Sister In Law’s house for Fondue. As we watched the numerous ball drop shows we came across one that caught my brother in law’s eye. It involved rappers from the ’80s performing their classic songs. Now I’m not much for rap, but I actually knew all of these songs from when I was in middle school. They used to play them at dances. Anyway as I listened, I noticed something. Most of the now old rappers could no longer perform. They were past their prime. The spectacle got me thinking, most things in life follow a growth and decline trajectory, is there a relatively standard Financial Life Curve?
The Beginning Stages of your Financial Life Curve
In the first few years of your Financial Life Curve, it’s all about growth. My father in law even said as much to me during our first discussion some 10 years ago. We were talking about careers and his statement was that my age in life afforded me the ability to adjust to increased expenses. What he meant is during your 20s and early 30s you start at the bottom of the financial salary curve. After that point for most people you see the most growth in income. Raises typically are frequent, and when they do occur they are larger in proportion to your income. At the same time your income is low so if you set your expenses based on the income at this time, the longer you can hold that expense rate the better off you will be in the long run. Obviously this speaks to the concept of avoiding lifestyle inflation. Anything you invest here will have the most impact on your life due to the benefits of compounding. Stock investments will double every ten years so even small investments will grow into massive ones by the time you reach the end of your financial journey.
The Middle Stages of your Financial Life Curve
As you approach the 35 to 45 age group you enter a different stage of life, a stage of life I’m currently in. At this stage if you’ve maintained close to your original expenditure rate you’re doing pretty well. You might have a family, but at a minimum you’ve probably decided on a career and family direction by now. Expenditures are starting to creep up. If you have not been holding your expenditures in tight control you may have an issue. Your pay increases are probably tapering off, so keeping your expenditures down now shows more immediacy. If you have been controlling your expenses you are likely at a point where you can take more risks. In my case I have a bunch of changes coming up for 2017. Under normal circumstances these changes might leave me with negative risk. That being said, because of what I’ve built to date there are very few scenarios which would truly cause me problems. As such I set my goals for 2017 as an aggressive baseline, and I still see potential upside depending on my decisions. The final thing that may happen if you’ve kept expenses under control is your investments may begin to churn out bigger gains than your savings rate during this time. This stage brings options beyond simply doing whatever it can take to hustle to pay the bills.
The Later Pre-Traditional Retirement Stages
For the extremely well prepared few, retirement happens in the 35-45 range. For the rest of the folks, after 45 there are still some years left of employment. Traditionally in this stage of life you’re at the top end of your career trajectory. It is not uncommon for many people at this phase in life to adopt a work attitude of just passing the days to retirement. Even those who do not have that attitude are unlikely to see major increases simply because most jobs in a chosen field top out at about 15-20 years of experience. At this point, expense control is a must. If you’ve not hit on a high savings rate from the beginning you’re going to need to dig yourself out of a big hole at this point. Without compounding it will really be hard to get ahead from here. For anyone that started from the beginning they will already be receiving more from their investments than their savings. It will be hard to catch up at this point which is why the top recommendation from financial advisers is to start investing early. If you have been saving and controlling expenses diligently it’s very likely you will have the option to retire during this phase from 45-65. Be aware your transition to the next phase may not be entirely your choice. Health and retirement age rules can force you to retire at this point, so hopefully you are prepared.
Post Retirement Stage of the Financial Life Curve
For any type of retirement, either early or normal, after this point things begin to decline. The rap stars we watched were great examples. Many had lost their voices or could not keep pace with their old songs. The same happens to you as you drift away from the work place. Not executing at work daily will cause your skills in your chosen field to atrophy. You will develop new skills depending on your chosen retirement activities, but they will be different. That being said, if you weren’t happy in your career you likely won’t be happy in retirement. Retirement doesn’t change who you are, it just changes your options for what you spend your time doing. Also for most people it only represents less then half of your Financial Life Curve. This is why its important to enjoy your path along the Financial Life Curve and find what you truly value. Because when you get to the end, what you really will have is the same thing you have in every prior stage. That is whatever you decide to pursue for value.
The Point of the Financial Life Curve
The lesson here is don’t retire early just to retire early and don’t rush life. Find what you value in life, and pursue it through all phases. Retire only when you’re ready and only when it gives you another option you value. Coming back to your old working life 5-25 years later will likely not be possible. Other doors may open due to your non working hobbies, but they may not be as good as the one you left behind. If you foresee any possibility of a need to return, choose a retirement hobby or activity that you may be able to later leverage if need be. There’s nothing worse then being the 55 year old retired rapper trying to relive your glory days with those in their 20s when you no longer have a voice.
Which stage of the Financial Life Curve are you in?