Growth is Good and Money Matters

Some students preparing to enter the work force and some early-stage professionals launching their career seek lines of pursuit that steer clear of what they believe to be the seamy, cut-throat, greedy world of business.

A course of study in, for example, Organization Development that leads to a career in Human Resources for a non-profit, government, education, or health organization seems like a path in which one might earn a living and have a positive impact on the world while avoiding matters related to money and growth.  Even for those in support roles and for organizations not known for profit, however, growth is good and money matters!

Figure 1: Growth is Good

With growth (see Figure-1)  an organization that does good can do it on a larger scale and have even greater impact; offer employees opportunities to do new and different things often with greater scope and scale of responsibility and so also at higher levels of compensation; and generate societal lift from the new jobs it creates, taxes it pays, and the platform it offers for community leaders to emerge, all in addition to the possibility of wealth creation in some cases. Without growth an organization stagnates, its employees get bored doing the same thing year after year at the same level of pay and eventually leave for a more exciting opportunity elsewhere.

Money to organizations, including non-profits, that seek to grow in order to have a greater impact, create the opportunity for those who work there to do new things, spawn more jobs, and groom leaders to help a town, city, or state, is like the gas in a car.  Without gas, a car stops running. An organization that does not think about, manage, and make ever more money, increases the odds that it will run out of fuel, cease to grow and, possibly, even to exist.

An aversion to, or fear of, numbers, dollars, and analytic thinking may mask a lack of confidence, energy, and drive; or provide a convenient hiding place in the name of idealism for those who simply do not want to work too hard.

Those in hiding may wonder about the wisdom of their strategy to steer clear of issues related to organization growth and money matters once they lean-into their discomfort and think through whether or not they personally plan to ever retire and, if so, how they plan to fund their living without an annual income.

Things start out simply enough.  After graduation from college  good

Figure 2: Working generates income to cover expenses and feed savings.

students get a job, work hard, get paid, spend on goods and services, and save the rest as suggested by Figure 2.  Savings, 401k contributions, pension, IRAs, profit from the sale of equity interests, inheritances, gambling winnings, and the like all contribute to an ever growing nest-egg to cover living costs when the decision is made to stop working.

After what seems at first to be an eternity, the time eventually arrives when it would be nice to stop working and enjoy the fruits of a career’s worth of labor. The question is: “How much wealth does one need to accumulate over the course of a career to finance living once s/he stops working?”  The answer depends both on the rate of spending and on the financial returns realized on what is saved.

If one plans to never stop working, then living continues to be financed by work and significant savings may not be necessary.  While working forever may be the only option for some, it eventually becomes infeasible due to infirmaries that come with age at which point perhaps there is a family member to live with or maybe it will be possible to live off the state or on the street. These may be good back-up options but likely not the first choice for most.

Figure 3: Assets drawn down to cover expenses.

Another option is to draw down accumulated assets (savings, 401k contributions, pension, IRAs, etc.) to cover spending for the remaining years of life.  The problem is that if life turns out to be long (which is, of course, the preferred scenario!) the nest-egg might run out as suggested by the graphic in Figure 3.

Figure 4: Annual gains cover living expenses.

With enough assets the nest-egg never gets smaller because annual gains from interest, dividends, and appreciation are greater than or equal to the sum of: annual spending, taxes associated with realized gains, and inflation. Whether one ever actually stops working or not, there is comfort in knowing there is no longer a need to work in order to finance living.  That is, enough assets have been accumulated to achieve financial independence as suggested by the equilibrium demonstrated in Figure 4.

A generation or two ago, many employers put away funds to payout to long-time employees in their later years in the form of a pension.  Some teachers, government workers, and assembly-line workers, and many others might have made what seemed like less along the way but in retirement they are in great financial shape thanks to fully funded pensions.  Pensions are far less common now.  Some are under-funded in that the amount put away is not enough to cover planned payments which can cause their organizations to go bankrupt.

Most employers now leave it up to each employee to provide for their own retirement.  Many contribute to employee 401k and TIAA CREF savings plans including matching funds put in by employees after some number of months of service and up to an annual maximum.  Employer contributions often vest according to years of service so be mindful when leaving to set departure dates in order to capture as much vesting as possible.  Such contributions are a most welcome benefit in that they provide real money to help meet long-term financial needs but far from enough to ever secure financial independence.

Figure 5: Assets Needed to Cover Various Levels of Annual Expense

Figure 5 and its associated financial model show how many assets are required to finance various levels of living. The second part of the model shows how  long a given asset base will last with a set of assumptions about living expenses, tax rate, inflation rate, and market performance.

As shown in the model, to finance living costs indefinitely assuming annual expenses of $100,000, an average of 3% inflation per year, and 4% for taxes requires $2.5 M in assets invested in a balanced fund (see: Sustainable Withdrawals High Net Worth White Paper December 2011).  Also shown is that $2 M in assets will be drained within 10 years with the same assumptions for taxes and inflation and $150,000 in annual living expenses.

Figure 6: Recommendations and Notes

Financial independence, once achieved, ensures that at life’s end the portfolio of assets can be used to cover  extraordinary medical costs that may occur or, better yet, left behind either to pass on to heirs or donate to chosen causes.

Growth is good and money really does matter.  Each of us needs to sort out how they plan to cover their costs of living once they retire.

See suggested additional readings in Figure 7 for additional insight on matters related to managing personal finances and investments. For  personal financial planning assistance see your financial adviser or contact Brian Kelley at The Mason Companies.

Figure 7: Suggested Reading