Occam's Razor

One of my life’s little mysteries is why I was suddenly able to retire three years ago at age 57. Granted that I wanted to retire and as one of those rare retirees with a comfortable pension I was more able to retire than most. Recently a sister announced her retirement effective January 2^nd. She will beat my young retirement age, retiring at age 55. She does not have a pension like me to draw from, but she and her husband are childless. Doubtless that was a factor. Most of my many siblings though are still working, some unhappily, and about half are older than me. Some I know prefer to keep working as the idea of retirement does not agree with them.

All this led me to ponder how we did it and what lessons you may take away from it. Much of what they say is true: start saving for retirement early, the earlier the better. Be relentless about this kind of saving. I did it through payroll deduction increasing the amount to periodically painful levels. At age 50 here in the United States you have the option to contribute additional money tax-free toward your retirement, so called catch-up contributions. I took advantage of that in my last few years of employment. Generally you are in your peak earning years then so it’s not harder to pour more money into your retirement pot.

While I found this all to be true and was reasonably systematic following these principles, I was often a slacker. I was in my 30s before I started saving for retirement, later than recommended. I was in my late 40s before I took a retirement seminar and found the time and money to integrate a financial planner into my life. One factor was that I was reasonably well paid, being in the IT business and in the last ten years in a managerial role. It wasn’t enough to buy a BMW, but it was enough to regularly have money left over and take nice vacations. When you are paid well it’s much easier to put money aside for retirement.

Still I just didn’t understand how we did it, so I was looking in Quicken the other day. I’ve faithfully used it since 1992 to track this stuff; I just don’t often analyze its numbers. Toward the end of 2008 the value of my 401K was about $162K. When I retired six years later its value was $323K. In those six years of course I had been putting a lot more money aside, but not $161K worth. Today, even though I have been withdrawing $1900 a month from the 401K since February 2015, its value is at $446K, so it’s gained $123K over just three years while taking $50K out of it. I should add that my wife also has a pretty good 401K nest egg that we haven’t touched yet. Our income is a combination of my pension and my 401K withdrawals. With some supplemental income of about $10K a year, we are living a comfortable retirement on $100K to $110K a year. It’s made more comfortable because we have zero debt. The house is all paid off, as are our cars.

So what happened to my sister and me that we are able to do this? It turns out that a lot of my sudden wealth was due to the Great Recession. It’s hard to quantify though but my guess is that it is 50% due to riding and profiting from the Great Recession. And I am sure we are not alone. While plenty of baby boomers are struggling financially, many of us are moving into early and comfortable retirements thanks to the Great Recession.

That’s because of a great wealth redistribution that in effect happened during the recession. Think about it. At its low point in February 2009, the Dow Jones Industrial Average (DJIA) was at about 8000. Today it is at around 21,000. The DJIA overstates the growth in the economy but it is an important benchmark. Over about nine years the index grew at an average of 18% per year.

In February 2009 stocks were incredibly cheap by today’s standards, and even by the standards of that time. Stock prices reflected a general sourness that people felt about the economy. No question that it was a scary time. The unemployment rate peaked at over 10%, huge amounts of paper wealth disappeared and those close to the financial edge lost homes, incurred additional debt and in many cases saw their income plummet. Stocks were traded in for cash for whatever the market would bear just to pay expenses. When stocks are traded someone else is buying. One of those people was me, at least indirectly. I was still buying funds via my 401K through regular payroll withdrawals. “Buy low and sell high” is the general advice you are given if you want to be an investor. I hadn’t intended to buy at a low rate, it just worked out that way. For years I bought stocks via mutual funds that turned out to be woefully undervalued.

With help from my financial advisers I was able to capture that wealth too, moving more of it into fixed assets like bonds. What goes up must come down, so there will be another recession in our future. But with a sizable portion of my 401K now in bonds, I can ride out the ups and downs in the stock market.

Curiously it was just the opposite from my late father’s experience. When the Great Recession hit he and many in his retirement community had to finance their retirements with cash. It was challenging because many did not have enough cash and bond funds to fall back on. He sold some of his stocks likely at a discount to keep going and hoped that the Great Recession would finally end.

It’s hardly a secret that the top 1% have vastly increased their wealth over the last few decades. During the last decade, they likely have you to thank. They picked up those sweet discounted assets that you sold and held onto them until the markets recovered. The low taxes on capital gains certainly helped in accumulating this additional wealth. To a lesser extent it raised our financial boat too, artificially so it seems to me. I too profited from your financial mistakes and misfortunes but until I put it together recently I never understood it.

And this has been the secret to much of my financial acumen: sheer luck but well timed financial calamities that I was able to profit from. We were similarly blessed with the timing of home purchases, with generally low inflation over the last few decades and steady employment. Yes, we did a lot of the “responsible” things that responsible people should do. But had the Great Recession never happened I’d likely still be working full time and probably not enjoying it that much, still waiting for a day when I felt it was safe to retire.