We tend to judge our decisions by outcomes. In her book Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts, Annie Duke points out the faulty logic of thinking this way.
We love things to fit in neat little boxes. But life is far more nuanced.
Nearly all decisions have to be made with imperfect information, making outcomes uncertain. Rarely does a single cause lead to a direct and predictable effect.
We can certainly make better decisions, and we should try. But it’s important to realize that luck and unforeseen consequences play a role in the outcome of those decisions.
Using this context, I’ll explore three financial decisions that undoubtedly accelerated my path to early retirement. But I’d be reluctant to recommend others make these same decisions.
“Mistake” 1: We Grossly Underinsured
For most working people, physical capital is their most valuable asset. It therefore makes sense to insure this asset in the event you can’t continue to work and earn income. There are guidelines for how much disability insurance you should purchase.
My wife always had short-term disability insurance provided through her employers. I never did.
We never felt the need to buy short-term disability insurance for me. We quickly built up an emergency fund, I was able to carry 4 weeks of banked vacation time, and we always lived on only one income. So we were confident we would be fine in the event of short-term disability.
Long-term disability insurance was a different animal. We appreciated how valuable it could be if one of us became disabled.
However, we also looked at the hefty price tag to insure each of us. We also considered that we were eligible for some long-term Social Security disability benefits.
We decided to take the risk of not buying long-term disability policies. To be clear, I am not advising anyone else do what we did.
There are several rules of thumb to determine how much life insurance you should purchase. By any of these rules, my wife and I have always been grossly underinsured.
We didn’t buy any life insurance until we purchased our home. The house was our only liability and it was valued at $250,000. We purchased $250,000 term life insurance policies for each of us, figuring that if one of us died we could pay off the mortgage (with some money left over) while the other got back on his or her feet.
After paying off the mortgage, we let our policies lapse. When our daughter was born, we again each bought $250,000 term policies.
By that point we were well on our way to financial independence. We figured it would make sense to give ourselves a little bit of financial leeway if one of us passed away prematurely.
With only one adult and one child to support, we figured our assets at the time plus the life insurance benefit would make us financially independent.
Why It Worked For Us
There is an obvious reason why being underinsured accelerated our path to financial independence. We were lucky!
Neither of us died or had a serious medical condition requiring us to miss substantial periods of work aside from my wife’s maternity leave. This is a perfect example of a good outcome not necessarily being indicative of having made good decisions.
I’m confident we made reasonable risk management decisions with life and short-term disability insurance. In either case, a negative event would have created personal hardship, but not necessarily financial hardship. Having more money would not necessarily have lessened the hardships.
Long-term disability insurance is harder to evaluate. According to the Council for Disability Awareness, “1 in 3 Americans do not have adequate disability insurance.”
We made a conscious decision to be in that underinsured one third, knowing we were diligent savers. Our rationale was that by saving and investing those premiums, we could accelerate our wealth building and self insure sooner than if we had followed conventional wisdom.
Our decision was also a bet on our marriage. Having two professional adults and relatively low household spending meant we could survive one of us becoming disabled, assuming the marriage survived the stress and change in relationship dynamics that could come with a long-term disability.
Ultimately this decision was probably more lucky than good. I’m not sure I would make the same decision if I had to do it again.
We’re grateful we’ll never know what would have happened if one of us became disabled or died. But undoubtedly the money we saved by being underinsured accelerated our path to financial independence and helped me retire sooner.
“Mistake” 2: We Paid Off Our Mortgage Quickly
In a popular post on this blog Darrow challenged the conventional wisdom that buying a home is a better financial decision than renting. He backed up his argument with solid mathematical logic.
“Big ERN” wrote in Part 15 of his Ultimate Guide to Safe Withdrawal Rates, “Don’t bother… paying down low-interest debt when young (mortgage, low-interest student loans). Put every last dollar you can scrape together into the stock market early on.” He also backs up his argument with mathematical analysis.
Rick Edelman wrote an article on his site titled 11 Great Reasons to Carry a Big, Long Mortgage. We can debate how “great” these reasons are, but each point has validity.
In spite of these sound arguments, my wife and I went all in on home ownership and paid off our mortgage as quickly as possible.
We had a fifteen year mortgage with a 3.75% interest rate. Instead of paying it down slowly and investing more in the stock market, we paid it off in seven years.
A lot of this was happening around the time of the 2008 market crash when stocks were available at bargain basement prices.
In most situations, paying off a mortgage quickly is not the optimal financial strategy. In hindsight, it was a costly decision for us to bypass putting more money into the stock market at the start of a historic bull run.
Why It Worked For Us
We as a couple, and my wife in particular, have more difficulty spending money from savings and investments than from a paycheck.
Paying off our mortgage quickly eliminated our biggest monthly expense. Analyzing our current expenses reveals that our three biggest expenses are food, outdoor adventure (gear, ski passes, etc) and charitable giving.
We spend roughly the same amount on each of these categories. Our next biggest expenses, medical insurance premiums and property taxes, are a fraction of the others.
We could substantially reduce our food spending and completely eliminate our other two big expenses (at least temporarily) if needed. We could not eliminate a mortgage or rent payment.
Having minimal monthly liabilities gave us courage to take more risks and take them sooner than we otherwise would have.
Being mortgage free first benefitted us after the birth of our daughter. My wife decided she didn’t want to return to full-time work. Having low monthly expenses gave her the courage to cut back to working part-time.
A few years later, it gave her courage to take her current job as the seventh employee at what was then a start-up company. It was a lateral move with less job security. This was strictly a lifestyle decision, to do stimulating work with a flexible schedule and the opportunity to work remotely.
Having low monthly expenses along with the financial ease with which we handled her transitions gave me more courage to leave my job sooner.
Mathematically, we would have been better off with a bigger portfolio which we could draw down to pay a mortgage or rent payment. But it would have been psychologically harder for us to make these lifestyle decisions if we had a large fixed obligation each month. For that reason, eliminating our mortgage was a good decision for us, even if it was a bad financial decision.
“Mistake” 3: I Focused on Low Paying Side Hustles
In my forthcoming book, Choose FI: Your Blueprint to Financial Independence we focus on the relationship between your savings rate and the time it takes to achieve financial independence. To increase your savings rate, you have to decrease the amount you spend, increase your earnings, or do both simultaneously.
For high earning professionals, the fastest and easiest way to earn more is to work more hours utilizing the skills that make you valuable. I could have picked up a few home care physical therapy patients or a weekend side-job to increase my income. Instead, I took on two side-hustles that I worked alongside my professional job over my final working years.
The first side-hustle was to work at the rock climbing gym at a local university. This required me to teach two classes per semester, train the student workers, and take care of ordering supplies. My compensation was about $5,000/year.
The second was to start my original blog. I wrote most every morning before work and spent many lunch hours and weekends working on the blog.
I never made a penny for my efforts. Writing the blog did lead to making a couple hundred dollars a year writing occasional freelance articles for the website Doughroller.
Even though these efforts did not generate a lot of income for the time required, they were instrumental in me being able to retire sooner.
Why It Worked
For many high earners, especially medical professionals, what you do becomes a big piece of your identity. You are a doctor, a nurse, an attorney, an accountant or an engineer. Many professionals also develop a dependence, an addiction even, to the comfort of regular paychecks that come with those titles.
It was both fun and empowering for me to see that work didn’t have to mean continuing on in a career I no longer loved.
The rock wall job showed me that I could earn decent money doing small amounts of fun work. It also taught me that hobby jobs can also help decrease spending. It saved me from having to buy a gym membership and entitled me to pro discounts when ordering gear.
Likewise, writing about personal finance made me feel more comfortable leaving my career behind. I always enjoyed the feeling that I was helping people as a physical therapist.
Writing enabled me to serve others in a different way, fulfilling that core need. Seeing my writing published in major publications also gave me a feeling of credibility and a new sense of identity.
While I never made a penny blogging prior to leaving my career, writing also provided me with a different model of doing work one time, then using leverage to help many people. This is in sharp contrast to trading time directly for money, which was all I knew as a physical therapist.
I realize some people view retirement as no work and no earned income. This is a valid viewpoint.
But it’s also important to realize that when you limit yourself to that tight definition of retirement, it increases financial risk. Having flexibility with both spending and earning provided confidence to take the leap from my career sooner than I otherwise would have.
Making Better Decisions
Successfully building wealth that enables early retirement then developing a plan to make that money last for the rest of your retired life are complex processes. Each requires making good decisions. But it also involves a lot of good fortune.
It’s important to improve our decision making process to increase our odds of having successful outcomes. This requires stepping back to evaluate our decisions from time to time.
We can control the things we can control. But we also need to acknowledge the many things we can’t control, or even predict. We also need to factor in both the mathematical and psychological impacts of our decisions.
All of these factors impact our ultimate success or failure in retirement . . . and in life.
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