Wealth vs. Income

Early retirees are often misunderstood when it comes to their financial status

“Have you ever noticed that when you ask a Britisher about a man’s wealth you get an answer quite different from that an American gives you? The American says, ‘I wouldn’t be surprised if he’s worth close to a million dollars.’ The Englishman says, ‘I fancy he has five thousand pounds a year.’ The Englishman’s habitual way of speaking and thinking about wealth is of course much closer to the nub of the matter. A man’s true wealth is his income, not his bank balance.”

— Fred Schwed

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Much has changed in the eight decades since Fred Schwed wrote Where Are the Customers’ Yachts. Globalization has reduced cultural differences between regions to the point where much of western society is homogenized, but perhaps the British still have a more enlightened view regarding money. But somehow this seems doubtful.

Morgan Housel hit the nail on the head in his book, The Psychology of Money, when he characterized contemporary attitudes toward wealth:

“When most people say they want to be a millionaire, what they might actually mean is ‘I’d like to spend a million dollars.’ And that is literally the opposite of being a millionaire.”

The vast majority of people regard wealth in a way that almost guarantees the dissipation of wealth rather than its retention.

Viewing what seems like a large lump sum of money as a representation of what that sum can purchase is a good way to return to having little or no wealth at all.

One of the interesting aspects of American consumer culture is the false assumption that retirees, as a group, are poorer than the rest of society. How else can we explain the prevalence of senior discounts? Price breaks for senior citizens appear everywhere if you know where to look. Senior discounts are a competitive tool for private businesses and politicians are eager to provide a reliable voting block with breaks such as the amazing lifetime senior pass for national parks.

If you call it quits at a “normal” age, your coworkers, family, and friends are unlikely to think that you are wealthy. More likely than not, the assumption will be that you have qualified for social security and, far from being wealthy, you probably have a reduced fixed income and might have to actually cut back on spending.

The exact opposite is true for those who retire very early. Society presumes that very early retirement is an indicator of wealth. This social attitude is a particular challenge for the “FIRE” community which stands for “Financially Independent, Retire Early”.

The vast majority of Americans are financially illiterate and spend almost all of their income each year. The FIRE community does the exact opposite. The typical game plan involves a period of aggressively saving a large percentage of income which requires much discipline and resistance to peer pressure. After ten to twenty years, many people in their thirties or forties hit their magic number and are able to leave regular employment with a solid plan to navigate early retirement.

But there are serious pitfalls ahead.

In his recent article, Rich and Anonymous, Morgan Housel describes the concept of “social debt” and the need to avoid it in order to maximize happiness:

“It’s a realization that once money goes from being a tool you can use to make yourself happy to a symbol of what other people measure you by, you are buried in a kind of social debt that’s hard to measure but has a real impact on your happiness.”

The moment you pull the trigger on FIRE, be prepared for everyone you know to come to the realization that you must have a substantial pool of assets in order to quit normal employment and have control over your time. Depending on the quality of your existing relationships, the effect of this realization can range from people being genuinely happy for you to feeling entitled to part of your hard earned wealth, which is the equivalent of feeling entitled to make a claim on your hard earned freedom.

If you want to avoid being noticed, it is safest to stay safely within the confines of a herd and to do nothing that seems unusual within your peer group. It is not unusual to retire at 62 or 65, but it is unusual to retire at 45 or 50. If you elect to do so, it will be necessary to resist any pressure to view your assets as spendable money rather than as a foundation that can generate income for decades to come, as it must for any retirement that might span four, five, or even six decades.

Social debt is not always a matter of people selfishly seeking a piece of your wealth. In many cases, social debt is something people impose on themselves, and this is not always a bad thing. It is perfectly natural to want to use your wealth to help friends and family who are facing hard times. But when others know that you have financial resources, self-imposed pressure can mount even if no one directly asks for help.

Social debt is a very important reason for early retirees to be extremely conservative when it comes to their withdrawal rate. The vast majority of FIRE articles that I read totally ignore social debt, not to mention the ordinary vicissitudes of life.

If you are an early retiree with financial assets of $2.5 million and a 4% withdrawal rate, you might think of yourself as a middle class person with spending power of $100,000 per year. However, you might be perceived by your peers not as a person with a $100,000 income, but as a multi-millionaire. Social debt can easily upend the apple cart and throw a carefully planned early retirement into disarray.

One obvious way to avoid social debt is to cut ties with people who seek to take advantage of your financial status. Money can buy many things in life but it cannot purchase genuine human relationships whether of a romantic or platonic nature.

Ultimately, wealth clarifies a great deal about human beings. We cannot avoid self-imposed social debt without becoming misers or sociopaths. It is natural to want to use financial independence to help others and this should be encouraged. However, to be in a position to help others without risking hard earned financial independence requires a very large surplus held in reserve. This is yet another reason to use very conservative withdrawal rates that are sustainable in the long run.

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