A significant proportion of my Mad Hedge subscribers are either retired or are about to do so. I have therefore gained a lot of valuable information about how retirees can best manage their financial resources, as well as the worst mistakes they commit, which I thought I might pass on.
I have also learned a lot by researching my retirement, not that it will ever happen, but it’s nice to know what choices are out there. So, let me get on with the show.
1) Spend Like There’s No Tomorrow
Because there might not be a tomorrow. We all had parents who suffered through the Great Depression, so Baby Boomers (those born between 1946 and 1962) are inveterate savers. They continue saving well after they retire, beyond any need to do so.
The cruel fact is that after the age of 80, it becomes physically impossible to do any expensive international travel. If you don’t believe me, try slinging some 50-pound suitcases onto a train in the three-minute window you’re allowed to board amid a teeming mass of other passengers.
This is where the “4% Rule” kicks in. You should be spending, not saving 4% of your assets every year to support your lifestyle. If you don’t retire until the mandatory Social Security payout year of 72 that’s enough to last until you’re 97. After that, you become the responsibility of your children, your grandchildren, your great-grandchildren, or the state. Note: you have only a 2.68% chance of making it to 97.
I had four aunts who lived to over 100. Believe me, it’s no fun. You can’t see or hear, taste your food, or have sex. You need full-time care. And your kids start to die off. That’s not for me. I have told my kids that if I ever reach that stage, take me on a long walk on a short pier and then pour my ashes into Lake Tahoe.
2) Invest Like a Retiree, not a 25-Year-Old
I have seen a number of my friends and clients completely change their investment styles once they quit work. Once they have all the time in the world to trade, they become more aggressive and overtrade. They take on more risks than they can handle.
They also subscribe to other newsletters that lead them into disastrous strategies, like naked put selling at market tops. As a result, they morph from money makers to money losers, right when they can least afford to do so.
3) Not Claiming Social Security
Incredible as it may seem, some retirees don’t claim the Social Security benefits they deserve. This happens because they think that the amounts will be too small to be worth the trouble, they forget, or they think Social Security is already bankrupt, a common Internet conspiracy theory.
Social Security will allow you your senior moment and let you apply for benefits up to the age of 72 ½ and still get your full benefits. In my case, I applied at the last possible moment and the Feds promptly sent me a check for $18,000. After that, you will lose them. Assuming you paid the maximum amount in Social Security taxes during your life you should receive around $36,000 a year. This is indexed for inflation, with the 2023 payout rising by a generous 8.7%. Add this up over 20 years of compounding and the total benefits can reach millions of dollars. As I tell my friends, you paid for it and deserve it, so take it.
4) Borrowing
One of the dumbest things I have seen retirees do is take out high-interest loans when they don’t need to. They do this by running up big credit card balances at 27% a year, coddling the above-errant kids, buying the above-mentioned boat or plane, or picking up a second home where the fire or flood insurance is higher than the mortgage payment.
The best investment you can make is to pay off your own debt, reduce your leverage, and eliminate nontax deductible interest payments. As a retiree, your life is about getting simpler, not more complex. My sole exception to this rule is if you are one of the millions who received a Covid Era 30-year government subsidized loan with an interest rate near the long-term average inflation rate of 3%. I don’t mind going to the grave (or the lake) owing the government a few bucks.
5) Don’t Coddle Your Children
While I was in New York working for Morgan Stanley during the 1980s, I had a lot of free time on my hands during the day because the Tokyo market didn’t open until 8:00 PM local time. So, the higher-ups handed me a lot of odd jobs. I taught an international economics course at Princeton, where I met Game Theory Nobel Prize winner John Nash. I took clients from obscure places like Kansas and Arkansas (The Walls of Wal-Mart fame) to lunch at Windows of the World at the top of the old World Trade Center.
I also was called to help out the kids of our largest clients. It seems becoming a billionaire takes a lot of time and there is certainly no time to raise your kids. They tried to atone for this lapse by giving their kids anything they wanted when they attained adulthood.
I ended up arranging cushy jobs, setting up meetings with politicians in Washington, scouting out Manhattan penthouse apartments, obtaining the best theater tickets, and even bailing some out of jail. I drew the line at buying drugs.
Over time, I observed that this excess coddling ruined these kids’ lives. They never developed careers, at best picking up expensive hobbies (like racing cars or falconry). They never learned financial responsibility, often investing in the failing startups of college buddies. Not a few died of drug overdoses.
The best favor you can do your kids is to train them well, invest in their education, provide a good role model, and let them stand on their own two feet. I have told my own kids that I plan to spend every penny I have and hope that the check to the undertaker bounces. If there’s any money left over it’s an accident.
6) Dial Back Your Lifestyle
Remember that you are not Jeff Bezos or Elon Musk, the richest man in the world. Match your lifestyle to your income. A friend of mine once told me that when he retired, suddenly everything became expensive. Writing this from Florida I can’t but notice the vast number of boats, which a friend described as “A hole in the water you throw money into.” Many of these are parked in a long-term mooring with barnacle-encrusted hulls because the owners can’t afford to sail them. I was a victim for many years of aircraft ownership, a “Hole in the sky you throw money into.” At least I could write these off as unreimbursed business expenses and claim the accelerated depreciation. The best case is to have a rich friend and borrow his boat. They’re usually unused.
7) How much is Enough?
I have surveyed many of my hedge fund friends as to the minimal amount of money needed to retire comfortably and the number of $10 million keeps coming up. That covers the 20% of any surprise medical expenses that Medicare won’t pay, $50,000 in the case of open-heart surgery. Sure, you could go to Mexico or Belize for much cheaper health care as I have seen many do but, that wouldn’t be MY first choice.
Other surveys put the minimum retirement number at $1.46 million, and 40% more if you live in California. But remember, even if you own your home outright, home ownership costs are skyrocketing, such as for insurance, association fees, utilities, and repairs. The world is changing, and you need to bank for the unexpected.
Send me Your Suggestions
I have great confidence in the ability of my subscribers to make mistakes and blow money. After all, I make them so why shouldn’t they? So, if you have any additional suggestions to the above, I’m all ears. Please email them in. I can make this a recurring piece which I update for the next 25 years.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
A Friend’s Boat
