When net worth stops mattering | Hacker News Reader

When net worth stops mattering

stanislavkozlovski.com

12 pointsenether11 comments

An interesting thought, but I think it falls apart a bit when it meets reality.

Most people want to retire eventually, and can't really predict what the cost of living is going to be or for how long they'll be paying it. So it makes sense to want to accumulate more wealth than your known spending needs demand.

Also, the alternative the author suggests is to spend only as much time as you need to spend in order to earn exactly what you need. This is also not particularly realistic, as many forms of labor don't allow you to precisely invest only as much time as you feel like, or stop/start working immediately based on whether or not you currently need more money.

There's another thing that no one really mentions within this context and it's that people who are saving usually want to retire into something better, not the same slog they've been living while saving. That's why it's ridiculous when you read these FIRE forums and people get feedback like "Why do you need more money if your spending is only X".... well my spending is only X, because I'm saving to build a war chest for financial independence where I can actually live a better quality of life than I do presently.

It also seemingly completely ignores that the theoretical person is not an island that is born and dies.

If I pass $0 on to my children I'd consider that to be one of the biggest failings of my life.

This post feels like a complete mathematical failure.

Ignoring inflation, taxes, etc, and assuming a return of 5%:

If you have 2 mil and you spend 100k a year then you will never go below approx 1.5M (the value of the capital will fluctuate a bit, in the perfect case you'd never really go below 2M) and can do that indefinitely.

If instead you "didn't have" that 1.5M and had 500K, then you can only spend 100k a year for approx. 6 years and then you have nothing left.

This:

> imagine no market volatility - everything is constant (e.g you've bought bounds)

is where everything breaks down.

Yes, if you keep all your money under your mattress, which is what's actually modeled here (bonds bear interest!) then as long as you don't run out, the unspent amount doesn't matter.

But that would be absolutely bonkers and no one would do it. Instead, you invest in interest-bearing assets. The current inflation-adjusted risk-free rate of return is 1.76%. So if you have a net worth of $2M, you could invest it in bonds and spend $35k a year forever and still pass on the entire principle when you die, essentially guaranteed. If you have a net worth of $500k, on the other hand, you could invest it in bonds and spend $8,800 a year forever.

Of course this would still be crazy - you can get higher yield by taking some risk (and notably, having a higher net worth will allow you to take more risks and get more reward without the risk of running out of money) - but even in the "just buy bonds" scenario, you're much better off with $2M than $500k.

> If you have a net worth of $2M, but throughout your life never go below $1.5M of net worth (i.e your assets never drop that much in value, and you never spend the money) - then it literally does not matter that you had $1.5M.

A $2M portfolio allows you to spend $80k-$150k per year yet never drop in value. A $500k portfolio allows $20k-$35k per year in spending with no drop in value.

How on earth can someone believe that the $1.5M didn’t matter?

Spending 100k a year buys you what? Security

What the author is saying is that most people never spend that money and instead can focus on finding security through other means.

Surplus money doesn't just sit around uselessly.

It provides both self-insurance and an inheritance budget.

So many unexpected things can happen. Market crashes, property damage or loss, health complications, need for unexpected long term care, a family member hits a life bump, etc.

The peace of mind of being prepared, and the ability to solve unexpected problems without stress, protect one's quality of life.

And any remaining surplus can go to loved ones, or a charitable cause one cares about.

And you get budget flexibility too. Give oneself a raise later. Go on an unanticipated adventure with an unanticipated new love. Buy that 100 year old scotch for your 100th birthday!

Given money (generally) grows exponentially, it doesn't take much surplus initially to accumulate a large surplus later. It is a huge opportunity loss to not plan for a surplus.

Agree, if the portfolio money is invested it is not useless because it's generating income to live above the "unspent money".

One of the concerns that many folks in the United States have, including me, is that their future out-of-pocket health care costs are unknowable. I _hope_ no one in my family gets a life-threatening disease that wipes out my savings, but that is probably wishful thinking. So far only one of my kids has had major medical issues, but who knows what the future portends.

Medical bills in the US are primarily paid via employer-provided health insurance rather than a single-payer (state-funded) insurance, and that means that medical costs are one of the most common causes of personal bankruptcy [0].

So when you consider the likelihood that you or one of your family members will need long-term medical care, the low bar for "net worth stops mattering" is a lot more than the article's author is suggesting

[0] https://www.investopedia.com/financial-edge/0310/top-5-reaso...

This (spending+net worth) is easier to get a handle on if you don't have kids, but as soon as I had a kid, the exact amount of money I really needed for full retirement with a degree of comfort for my family became a lot harder to track. As they get older, it should become easier, but for now my spending skyrocketed compared to pre-kid.

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