Intro – Episode 5
What does your retirement look like, and why?
What do you normally think about before you go anywhere?
Anyone who has ever left the house before has probably had to think about something before taking a step out the front door. Anyone who hasn’t, this analogy won’t really apply to you but for those of us who have, what was the last thing you thought before going to the shops? Probably fairly common – you need to do a list of what you’re going to buy. And sometimes it’s a spontaneous trip of just going to get one item. Thankfully, for this a lot of habit and routines kick in to take over the duty of actually getting to the shops, because it is a relative common occurrence.
But say you have to drive to your relative’s house and they live around 8 hours away. It’s probably going to take bit more planning than just popping down to the shops or even driving to and from work every day. But generally, an 8-hour drive in the modern age (with cars) you’ll not need to put too much planning in to it.
Say for instance you’re 15 minutes down the road after you leave your house on this 8-hour trip, then all of a sudden you realized you forgot a gift that you were taking to [your] relative. You probably would just turn home and grab it, because is a lot easier then actually try to find a new one.
But say for instance you are an hour into the trip; the car breaks down, you wait for RACQ to come, they tell you that it’s either going to have to be towed away and repaired, or they can just lend you a car a now, they’ll deal with it, and you can drive on.
Either way, what decision you make is actually all around why you are going, because if you are going to take the additional resource and spend money on not only fixing the car, but having it towed away, and having a hire car, plus the additional hassle of trying to come back, and at the same time trying to figure out what’s wrong with the car… If you’re not going for a reason that means a lot to you, you might just be likely to take the first taxi back home and just have the car repaired and pick it up in the morning.
If you’re going for your cousin’s 21st birthday you might call and just apologize… but, say it was someone’s funeral. You’re much more likely to still proceed with the journey. So that analogy is really just finishing off from last time where, the “why” you take the journey really matters more than anything. And depending on the reason as well, it would trigger different responses based around what the incentives are.
So, if you’re hungry for instance, or you’re thirsty even, that’s just a basic need. Beyond a basic need though would you prefer to receive something now or something later? And it really depends how big is that thing, and how quickly do we get to have it.
Years of behavioral studies really show that, there’s [a tendency] to prefer something right now even if it’s a smaller reward than something we would get in the few days’ time. And it’s all about what we perceive the value of it to be.
So, if you perceive something as very valuable (even though it might not be valuable to others) you pay more for it, you’ll go to much greater effort to obtained it, and that’s part of your “why”. What you perceive to be in the future and what you want to achieve has a perceived value. So, imagine you’re hungry again and you couldn’t leave where you are. You’re stuck there for say 6 hours or so. Someone offers you a sandwich or even tells you that you can wait and then have two sandwiches, what option do you go for? So, if you’ve got 6 hours to wait and someone says that you can have one sandwich now, or you can wait and have two in 30 minutes (depending on how hungry you already are) just wait that 30 minutes out and then have two sandwiches, and that might get you through the 6 hours. However, they said that you can have 17 sandwiches in 8 hours, would you still take them up on the offer? The offer itself seems far less attractive because technically, if you’re really hungry now, in 8 hours you would be out of where you’re stuck and you’ll be able to get your own food and not be forced to have a sandwich. It’s the exact same rate of return; a sandwich every 30 minutes but it becomes much, much less attractive because it’s in the future and we need that sandwich now. So, it’s been experimented on a lot in the past – and there’s a thing called the Stanford Marshmallow Experiments (they’ve done recreations of these studies a lot, but just go to YOUTUBE and checkout a video) it shows children put into a situation where they can do exactly that, they can get one treat now or they can wait out until the researchers come back and the researchers will give them two treats so, the expected value of what the kids thought of around having two treats is preferable to one.
It was shown that those kids that could distract themselves and could focus more on the greater value rather than the instant reward, did fairly better in a lot of metrics even later in life, even getting into high school, getting into college and then their later careers as well as because their ability to delay some gratification slightly to help to move toward that future goal.
And the reward itself – it needs to be something tangible to you – because if you don’t like marshmallows or you don’t like sandwiches, then you’ll probably pass up on these options. Friedrich Nietzsche said it perfectly where, “He who has a “why” to live for can bear almost any how”.
Imagine that again you are hungry but you have no money this time, and you’re still stuck there for 6 hours, so… you got a family to feed back home and you’ll likely wait that 8 hours then for the 17 sandwiches if you can’t actually afford to get the food on your own. And that’s, again, just the perceived value where, if you do have more of a resource, then you might not actually wait out because the perceived value is less than if you don’t have money to buy the sandwiches. It’s a lot about scarcity and time, so the more scarce something is, the greater value would put to it …but at the same time, the longer and the future we have to wait the less value. So, it’s about finding a balancing act between the longevity of your goal to still keep it motivating, such as financial independence which for most people is very long journey. So, it’s hard to stay on track and keep motivated, especially when there’s not a clear aim or idea about what that why is.
Take for an example a common retirement dream were people think that they would travel and tike off all the countries on the bucket list, or just sit on the beach and drink cocktails all day at a tropical resort. How long do you think you could realistically sit on a beach drinking for the remainder of your retirement? You probably could manage it for a while but the accumulative hangover would probably become a bit of an irritant after a bit.
Or even just travelling to different countries, how long could you be on the nomad’s road just traveling across Europe or South America before finding out you’ve been everywhere …and then “what to do now?”.
So, the whole point is [that] just having a fixation on a moment or activity in time isn’t a tangible “why” to enter into the road to financial independence. And unfortunately, we can’t really experience the same moment of time over and over and not have that scarcity again of the abundance of the thing. [It’s] become less valuable so, we perceived it’s very valuable, because we don’t get to go drinking on a beach all the time or we don’t get to travel that often. But when we start doing more of it, it’s actually more of common occurrence, therefore the scarcity in us makes it slightly less valuable. Again, you can’t really live out that same moment unless you’re Simple Rick and have it really the same emotional magnitude. If the activity played out for years and years, you might really want to move on to something else and that’s the unfortunately thing as well with the next shiny thing that’s pops in – something new, something “now” provides some satisfaction and it’s essentially the same satisfaction that drinking in the beach provides – except we can get it now rather than waiting until retirement.
And what you’re aiming for is really just a motivating factor and is actually sustainable over the long term, where as something that’s the alternative to really achieving financial independence can also be motivating if you’re not quite sure were to aim.
So, imagine that your income is now capped, you’ve got around $23,200 per annum in income, in your life right now how would you get by?
If you have mortgage – it’s probably almost the size of the mortgage repayments itself – let alone if you want to travel, to keep up with daily living or even buy groceries.
That figure I just provided, is actually the maximum pension income for a single home owner in Australia. It’s $17,530 or so, if you are in a couple (so each couple gets $17,000). And generally, it’s not a lot of additional income to pay for all those lifestyle wants when you’re younger. And it feels pretty awful in that situation. I work with clients in that situation, where it’s about managing the cash flow – and it limits options, and I really feel for people in that situation. That’s part of why this podcast has come into existence, where helping people avoid this is quite an easy thing… if it’s just done consistently over time.
But where does the money come from to fund such a system with the age pension? It would be great to have more and more income for individuals who wants to do more. Given our unlimited wants, what [calculation] can be place on the income like that? And how long can it be funded for, because it increases at a certain rate where it might actually start demotivating people? And it might actually be a certain limit where, if you provided universal income of $50,000, would that actually create happier people if they still have a lot of resources to find the beach every single day? And the most important one – because I’m not going to even try to answer the previous ones – but the most important is really, will it be around?
So, the age pension was introduced back in 1904 and it still had a relatively similar eligibility to today. If you were 65 years old in 1904 you could obtain the age pension. But the little catch with that is the life expectancy back then was between 54 to 58, so it’s a fun trick to play on people – when you introduce something saying if you reach a certain point you’ll obtain it. People started living a lot longer though from the 1930s, and the eligibility didn’t really increase up until a few years ago…So, it’s become a large allocation of the government’s budget.
It wasn’t really counted for 100 years (like nothing can ever really be) but when the total expenses are $450 billion, and they spend around two hundred of that on transfer payments, it might take them some time to actually catch up to being able to afford that – or they’re going to have to reduce it.
I’m not saying it’s a good thing, it’s just a possibility because we’ve seen all round the world that government can go bankrupt and when they do, transfer payments is the first thing to go. It’s never their salary.
So, with history it’s a good, valuable lesson – not saying it’s going to happened here – it’s just that it’s something that you can’t control and the whole reason for independence is to have control over your situation.
so, what’s the main reason that you’re taking a journey to financial independence?
If its avoiding a similar situation to the previous one, or if it’s striving for something else in mind, where you’ve got a dream about what you’re trying to achieve (even a hobby that you want to become a full time hobbyist at), that’s something that you can put a tangible value to almost as long as you know when you want to achieve by, and what it would cost to sustain your living expenses.
By this point, we think we really had it as far as putting together the picture of how to achieve financial independence over all…but unfortunately that’s where the hammer dropped for us where there’s only so much knowledge, structure, advice anyone can provide.
As long as there’s that why there (as to why you are going towards financial independence or along that journey), that “why” will actually make up more of an effort, or value, or just long term success than as any really of the other factors put together.
So, we can’t tell you what you want, nor really can anyone else. That’s the disconnect between a lot of the information that is provided where it’s structured in ways it seems like it’s what we want to achieve. But unless you really figure that out first, it’s almost like the rare golden watch era where people would get the job, be in the same position for decades and decades, and at the end get the golden watch… and that’s what a lot of peoples’ retirement dreams feels like where they get the watch and now what do we do?
So, the relationship between completing a task and the incentives needed to do it is totally separate as well, because the journey is more satisfying than achieving it.
That difference is motivation versus satisfaction. Satisfaction is just momentary, if you get a new car, you get a new house anything like that actually provides a satisfaction to you, depending on how it satisfied you are with it, it will either provide a little bit of happiness, a lot of happiness but it all reduces to the same base line level almost. It’s all about increasing along the way and the journey. Because the journey itself provides more happiness I guess you could call it than actually obtaining what you set out for.
And even with a goal in mind you realize there is lot of effort required to get there once you start, so, having that “why” and having something tangible to aim toward really helps motivate and keep working through the goals. Unfortunately, it’s not easy otherwise it would be not a topic we’re covering… so, reducing the barriers to these problems is what we want to achieve.
So, reducing the effort in conjunction with responsibility, understanding and frameworks, essentially, to provide an easy framework that is something that’s generally complex (but the easier the better). So, from the next episode we will be wrapping up – it’s a bit of a wrap up party, a summary on all of these episodes put together and then from the seventh we’ll start with really what the podcast is all about.