Edited Transcript:
What's up everybody--Michael here. I wanted to put a little message together to chat about some things I've been thinking about this week. As we go through the years, one of the things that I'm learning is that I enjoy doing these video messages.
I feel like it's a little bit more personal, but to the extent that I can, I try to write to put messages out so that you hear what's going on in my mind. Hopefully, we can all learn and build together as I'm having continual conversations about markets and researching the economy, stock market, market movements, etc. I'm also having countless conversations each and every week about money, and kind of have boots on the ground if you will.
I want you guys to benefit from that. So, those of you who watch these videos, read the newsletters, and work with our team, I want you to be beneficiaries of all that we experience daily as financial advisors. And one of the things that I've been chewing on lately is this idea.
It's not an idea that's unique to me. It's not something I've created, but it's a term called escape velocity. I bring that up because, well, first--escape velocity. What is that? Well, you can do a quick Google search or chat GPT, but it's the speed required by something to escape the gravitational pull of another object, another like a celestial body.
So, for example, if we're going to launch a rocket or a satellite or something into space, it has to reach escape velocity to get outside of the Earth's gravitational pull. And what's got me thinking about that more and more lately? There are two ways that I've been thinking about this.
One is one of my most common themes, if you will when I talk to people about investing. I say we have two things we have to outpace when it comes to real wealth accumulation. And those two things are inflation and taxes. Right?
Inflation and Purchasing Power
If inflation is 3%, a dollar today will buy us 97 cents worth of goods a year from today if inflation is running at 3% on an annualized basis. Over time, our purchasing power is decreased, which is why workers want wage increases in their jobs. You know, we want to earn more money with our abilities and our skills.
Well, it's also why it's important for us to think about our investing and our resources in terms of real returns net of inflation. If we're putting our money aside and getting 3.25% or 3.5% on our cash, but inflation is running at 3%, well, our real purchasing power is only growing by less than 1 percent per year.
And so, yes, we're not losing money in the sense that, that the market could go down. The money does not have market risk attached to it, so we don't have principal risk. But we do have purchasing power risk.
That (purchasing power risk) is something that many people don't consider when they're looking at how they need to have their funds allocated.
Inflation and Retirement
The second thing, with inflation, is when we think about long-term goals like our retirement and years in retirement. A phrase is often used -- "Two people, Three decades" when it comes to retirement.
So if you're a healthy couple in your sixties, there's a good chance one of you will be alive for at least three decades. What kind of decrease in purchasing power can occur if we just experience average inflation over 30 years? That's a significant decrease in purchasing power over time!
We already know that things like healthcare tend to outpace normal inflation averages. So these are things we have to think about when preparing and planning for our retirement years. I'm using the term escape velocity because we want to grow our purchasing power and outrun the gravitational pull of inflation on our purchasing power over time--especially if we are living on our savings and investments during retirement.
Don't Forget Taxes
Most of the dollars that we have invested are either invested in a qualified account or invested in a taxable account. So, we're paying some tax on those dollars when distributing them to ourselves. We want to use these dollars for our regular living expenses or for fun, entertainment, enjoyment, lifestyle, lifestyle, experiences, all those things that we think about and dream about. When we want to use our funds, there will be some tax implications.
If we think that taxes may increase over our future life expectancy, then we have to think about that as well. What will our real purchasing power be on these dollars, net of inflation, net of taxes? This is what I want everyone to start thinking about when it comes to how we are investing and why we're investing because this is the escape velocity that we need these dollars to reach. If we want to grow our purchasing power over time and not just maintain it, we have to invest accordingly.
Financial Independence
Part II of this, if you will, is this idea "how much is enough?" There are some investors, some people who have probably won the game. When you look at their assets on paper, their balance sheet, and their lifestyle; there doesn't seem to be any challenge ahead. Mathematically, at least barring some unforeseen black swan event or something, they're probably never going to spend all of their money. At least, they won't have an issue outside of something outrageous happening.
It may just be mathematically very improbable that they'll ever spend the money that they have. So, these people have reached what I would say is escape velocity, meaning the continual compounding on their assets is more than sufficient to meet their lifestyle needs, their spending goals, and they've hedged the risks that they want to hedge.
They are now net wealth accumulators. The reason I think that's important is because now it becomes about your mindset at that point. If you've won the game, if you've got more money than you'll ever spend, what then? What's the next move?
Do we want to become more charitable? Do we feel like we need to continue taking risk? What drives us at that point? And there's no right answer. There's no wrong answer. There's only the answer that's right for you.
I think that's one of the things that gets missing or lost with a lot of people because we're coached for 30-40 years as we're working and saving that--we've got to work, we've got to save, we've got to work, we've got to save, we've got to grow these assets.
And there comes a point, at least for some people, where the math is now the math; unless something completely unforeseen happens, they're never going to spend all their money. It's not mathematically possible. So then, what's next?
I want you to think about this as well because, first and foremost, we've got to think about the purpose of our dollars. What is the ultimate purpose of these dollars? Future dollars for us to use in retirement? Future dollars to fund education goals? Legacy?
It's only going to get more expensive over time with inflation and possibly taxes. So we've got to think about our own escape velocity. How do we outpace and actually grow our wealth and grow our purchasing power? And then two, once we reach escape velocity and we've got our lifestyle goals funded, our emergency funds are funded, you know, aspirational goals are funded.
What then? Do we just keep on keeping on? And if that's you, that's okay. But let's figure that out together. We may want to change some of our strategies for the future. Ultimately, our goal should be for you to maximize the meaning and enjoyment of your dollars, the money that you're working so hard to earn, and the money that you're working so hard to save.
We want to maximize the fulfillment that your money can bring because money is a tool, right? Money in and of itself isn't going to make you happy. It doesn't make us happy. However, the things that money can allow us to do to-- be generous, have life experiences, build relationships, be involved, to give back-- all those things can bring us tremendous fulfillment.
So, let's work on a path to doing those things. How do we grow our purchasing power and maintain our purchasing power over time? And if we have a finish line...and we reach that finish line, what is next?
These are my thoughts. Let me know if this makes sense to you. What are your thoughts about Escape Velocity?