Life in stages
Life can thought as a succession of economic stages. Some of those stages are more appropriate than others to prepare the future.
Resource and liability
If you’ve watched the TV show The Walking Dead, you know that people are a resource. Most companies have an HR department, which stands for Human… Resources.
Actually, people are only a resource… when they work. When they don’t work, people are a liability, from a stone-cold economic point of view. We all need food, shelter, Lego, and health insurance, which all cost money. And if we’re not paying for it with the income we draw from somewhere, someone else has to. Unless we get sufficient income, we are a liability to someone else. Sometimes, that’s OK. Think of yourself as a 10-year-old: as sweet and cute as you might have been, you were a liability to your parents, because of all the food you ate and the absolute lack of income you brought. Ah… the good old days when 6-year olds worked at the coal mine… Anyway… moving on…
It’s common, as we go through life, to experience different combinations of resources and liabilities. We usually start our career around age 25, single, working, with no kids. 20 years later, we’re usually still working, with a partner working and with one or more kids we have to support. Any combination is possible though. Let’s have a look at the following table:
|Not working||Single||no kids|
|Not working||Single||with kids|
|Working||Partner working||no kids|
|Working||Partner working||with kids|
|Working||Partner not working||no kids|
|Working||Partner not working||with kids|
|Not working||Partner working||no kids|
|Not working||Partner working||with kids|
|Not working||Partner not working||no kids|
|Not working||Partner not working||with kids|
I’m assuming that someone working is a net resource (income is greater than expenses) and someone not working is a liability. From an economic point of view, maximizing resources while minimizing liabilities is the right thing to do. In that sense, the configuration “working, with a partner working, no kids” is the most desirable economic state. It might not match the overall most desirable state, but we’ll leave that aside for now to focus purely on economics.
“Not working, with a partner not working, with kids” is the least desirable economic state, because there are no resources, only liabilities. And yet, there are people who are, by choice, in this configuration: retirees. How do they manage to be in this state? Remember the discussion above: if you’re not paying for your own food, shelter, Lego, and health insurance, someone else has to. Well, for retirees, their pension is paying for it. In other words: their capital.
Capital is the additional component to all life stages, the third wheel, if you will. It can be a resource (when it’s correctly invested) or a liability (when it’s debt). Retired people can move to a state of “full liability” for themselves because they’ve built a resource which pays for their expenses.
In Switzerland, the law mandates anyone who works to contribute to their capital through the obligation to contribute to a first and second pillar. It also encourages workers to contribute more by allowing tax deduction on the third pillar. But it is possible to go beyond the traditional retirement pillars and built capital on our own, by buying real estate, gold, Lego, bonds, or stocks. (At that stage, you might wonder what’s up with all the Lego, and rightfully so. The thing is… I like Lego. That’s it. Now you know.)
Why build capital?
Why would you want to build capital? Well… because, at some point, you will be too sick or too tired to work. And at this point of your life (usually around 80), you will become an economic liability for yourself and need someone else (your capital) to pay for you. That will happen for sure, unless you get hit by a bus or cancer on your way there.
What might also happen is: you might want to do something else with your time than working. That’s what most people do around 65: they stop working, not because they can’t work anymore, but because they want to pursue other interests: gardening, cruising the Pacific, grand-children sitting, etc. This is not a must though: lots of people keep getting an income after the official retirement age.
Some don’t want to wait until they’re 65 to pursue other interests. Stay-at-home parents, for instance, forsake the cruel world of corporate Switzerland to pursue parenting as a hobby/duty/unpaid job. They can afford to become an economic liability usually because their partner’s salary is sufficient to pay the bills. For example: I became a stay-at-home dad for 9 months because my wife was still working and we had some capital we could use to make up for the rest.
Others want to change profession mid-career and need to go back to school. They become an economic liability for a few years.
Still others start their own business and can’t afford to pay themselves a decent salary (a salary which pays the bills) for six to twelve months. They also become, temporarily, an economic liability.
So building capital is not only useful for retirement, because it also serves short-term projects.
The key to successful life planning is to use the different characteristics of these life stages to your advantage. Of course, you can’t plan for everything, neither would you want to. But you can set yourself up to have options. And make sure that our short-term decisions don’t impact the long-term consequences too negatively.
For instance, at age 30 Marcel wants to stop working for a year to travel the world. It would cost him half of his savings. That sounds great but can he afford it? In other words, does spending this money now and losing the income of a year worth of work hurt his other goals? If travelling around the world once is the only goal he has aside from retirement at 65, then he’s probably fine. He may go ahead and enjoy the ride. But what if he also wants to have kids in the future and take care of them full-time for five years? Well, I would fire Excel just to make sure, but it seems reasonably reasonable. What if he also wants to start his own company at some point and need to invest 50k with a 50% chance of losing it all? Here it starts to be tough. He probably needs to choose. And if he chooses the trip over retirement at 65 (and shoot for 68 instead), then more power to him.
Planning doesn’t mean saying no to everything we like. It just means making sure we get what we really want. And it’s only when you’re aware of the implications that you can make informed decisions that you don’t regret later.
I remember an evening with friends. This girl, Alex, shared her life plan. She was in her low thirties working 70% as an assistant kindergarten teacher in Zürich. She said that 70% was more than enough to cover her expenses and everything left on her account was spent on experiences. For instance, going to South Africa for a week to learn how to make hats. She had no interest in having a career nor a family. She just wanted to learn and experience different things.
I thought it was great. I love seeing people prioritize their goals over conformity. But at one point in the conversation, I said: “The only thing about working fewer hours and spending everything you earn is that you have to think of retirement”. She looked at me dead in the eyes and told me: “If you’re thinking of retirement at 25 (I was indeed 25), you’re doing life wrong”. I don’t remember my response because I was too shocked to have a memorable comeback.
She thought I meant: you shouldn’t do anything in life because it might compromise your retirement. But what I meant was: if experiencing new things and retire at some point both are goals, you need to set yourself up so that you can reach both. And if you can’t reach both, you need to choose which one to reach and be OK with the consequences. Or make some changes. Maybe it just means saving 10% of your income for 10 years.
Good times and bad times
At some point, we will need capital, since we are all going to be too sick and tired to work. But there are good times to build that capital and there are bad times to build that capital.
For instance, a good time to build capital is: both working, no kids. Why? First, because there is a lot of disposable income at this stage: two salaries, no liability. Second, because that usually comes early in life (typically before age 40) so compound interest has plenty of time to work its magic. And third, once the capital is there, it can serve other purposes as well, early in life. Do you really think you’ll start a business at 55? You probably won’t bother. So better have the money ready at 35.
When is a bad time to build capital? When kids are in school years, one parent is working part time and the other is trying to start a business. Why? Because it’s very difficult to prioritize savings in this situation. Not only is it difficult but it’s also not advisable. You want to buy your kids Nutella and Playstations, not to spoil them but just so they get a normal childhood. You want to be able to invest in your business at the start. You don’t want the other parent to burn out by working and parenting in double shifts. In general, when life is complicated, it’s a bad time to build capital.
The issue with not building capital at the right time is that it will force you to build capital at the wrong time. It might force you to prioritize building capital over more important things, like spending time with your small children. You might also have to miss opportunities because you can’t afford the risk of temporarily becoming a liability. Or it might be at the detriment of your health: it’s a terrible idea to keep working when your body and/or your mind need to rest, and yet, lots of people do it because they don’t have a choice. They need to be a resource because they can’t afford to be a liability.
Not thinking about life stages can have other perverse effects: it can lead some people to oversave (funny how “overspend” is a common verb while “oversave” is marked as an error is my text editor). Lots of people do save too much! Why? Because they think they have to. In reality, you don’t need to save that much. It’s pointless to accumulate wealth just for the sake of the accumulation. Money is meant to be used. If you’ve built enough capital to reach your short- and long-term goals, why on earth would you keep saving? Spend it. Donate it. Earn less of it.
Some people work full time their whole life just because they are scared of running out of money in retirement. They would love to pursue other interests, but just because they don’t run the math, they assume that they need to work until 70. That’s what Alex thought I was doing.
It’s worth it to sit down and think about life stages. Here is a list of questions you can ask yourself:
- Where am I at right now? How much capital do I have?
- What are the things I want to achieve or experience? How much are they going to cost?
- How much more capital do I need to reach all my goals? Is now a good time or a bad time to build this capital?
- If now is a bad time, when will be a good time?
What is your life plan and where do you struggle? Send me an email at firstname.lastname@example.org and let me know.