The 'standard' financial independence advice out there is to live below your means, save 20+% of your earnings and you should be able to retire comfortably once in your 50s.
However I'd say that a lot of typical financial advice or guidelines are less applicable to members on this forum who have the potential for really high earnings in an IB/PE career track.
As a junior in PE, I have constantly maintained a high savings rate (50%+) because of my wish to achieve financial independence early.
I'm good at my job. I know that if I can stick it through to Partner I'm guaranteed to make 5-10x what I'm making now. When I realize that I can save my entire entire current net worth in just a few months when I'm at that senior level, making the sacrifice in the present seems a lot more insignificant. I should mention that I do feel like I am having a great quality of life even at a 50%+ savings rate due to being in a LCOL area and just generally not having any expensive hobbies, so its doesn't feel like I'm sacrificing a whole lot.
How do you balance saving in the present vs. spending in the now?
pages 9-10 of die with zero, should be available on the amazon preview
https://www.amazon.com/Bill-Perkins/dp/0358099765
I recently changed my ideas on this after having a record year professionally but having minimal days off. I was saving 40%+ of my income and recently have backed off. here's what I did personally, we'll see if it works out
the conclusion is that I still have a savings rate of over 20% but I am getting more enjoyment out of it and so the feeling of "I could've done more" is significantly lessened. mapping out my calendar really helped with this, because I can clearly see that I'm making the most out of the time I have and also not taking away from my future savings goals
in bill perkins' mind and I think the crux of your question is "why save so much now when it'll pale in comparison to future earnings?" and to that I say not so fast. no guarantee you make partner, no guarantee PE doesn't get shellacked by elizabeth warren and those carry payments get taxed much more heavily so your $2mm bonuses get cut in half. I prefer instead to rely on conservative assumptions so you're protected for the future but make the absolute most out of today + some optionality.
all I've had to sacrifice in doing all of this is materialistic shit
Do you actually want to die with zero, or do you just think the book has some useful frameworks for figuring out how much you need for retirement?
What about unexpected medical costs in retirement? I know you have mentioned you're fairly healthy, but you just never know.
You also mentioned children. What is your attitude toward leaving them any money? Would you want them to have an inheritance, or just provide them the childhood and education you desire for them while you are still alive?
Sorry for bombarding you with questions, but you always have interesting insight haha
I haven't read the book, so bear with me here. But in line with zeroing out the account the same time your heart rate zeroes out, do these retirement plans also include additional estate planning goals like savings for family?
do I actually want to die with zero or is it just a useful framework?
- I don't necessarily care if I die with zero, I'm pretty sure I don't want to enrich any of my kids who can fend for themselves, and I intend on giving to charity during my life rather than assuming organizations can do well by my values after I'm gone. I'd say more than anything it's a useful framework that has somewhat psyched me out of what we're taught in PWM - capital preservation at all costs. we're taught to minimize the probability of running out of money and use (sometimes) incredibly conservative assumptions to have clients spend far less than they could. part of this is the fact that this is a very real fear that people have, part of it is the downside of not having your passport full of stamps is not as bad as being destitute when you have 10y of life left, and the cynic in me thinks part of it is PWM firms wanting to maintain AUM, but it is what it is. the framework I outline above is what I got from the book mostly (in addition to some changes we've made in how I run my practice, small changes though), but the theme is this - if I've decided I need to save X0% of my income to meet my goals, why is my default to save 2x that? why not try to get more out of my resources if it's not going to ruin me financially? my maternal grandparents grew up dirt poor under jim crow and were quite literally on the other side of the railroad tracks and pulled themselves out of poverty, so rather than being offered anything all I heard as a kid was "we can't afford that" even though I had a suspicion we could. not spending money was treated as a virtue, and you were looked at as a sucker if you spent money on anything, even if it brought you great joy (my family still can't get over how much I've spent on surfboards over the years). I don't know how else to explain it, but the book helped psyche me out of this. maybe it's because I feel more comfortable in my career than I ever have, maybe it's because the pandemic got me deep into stoic philosophy and thinking about death and fulfillment more, I can't say for sure, but this was the hard part.
unexpected medical costs?
- I plan on having enough $ in the bank or enough home equity such that this won't be a concern. I've modeled this into my own financial plan as well. the other part of this that helps insulate me is that the vast majority of my expenses will be discretionary, I plan on having little fixed costs, so if my travel and entertainment budget gets shellacked because I develop parkinson's, so be it.
children
- no inheritance goal, I've thought about making them trustees for a charitable lead trust (if I have kids) and then they just get the remainder if anything's left, forcing them to be good stewards of the capital, I believe in education and helping them when they need it. specifically, down payments/outright purchases of first homes, weddings, grad school, bootstrapping their businesses, etc., but I will make it very clear that my plan is to die with zero so that even if I don't, they plan accordingly. I see this all the time in my practice, 90 year old patriarch dies and his kids in their 60s get millions when they're already retired with their own millions, what's the point of that? now some people are just so rich they can't avoid that, but that won't be me if I can help it
that said, all of this is an evolving idea. I have a valuable business but compared to liquid assets I don't have a ton. I also don't have kids and I'm still just in my 30s, so maybe I'll completely renege on all of this in 10y, who knows. what I can say for sure is rather than burning the candle at both ends I will be aggressively travelling this year, my goal is 4 or 5 international trips
Kids?????? Wtf, I thought you were No Kid Nation man
Never is a long time. Still none in the picture and wife is saying "no for now," but just like everything else evolves, so too do your opinions. We'll see, I'm open to it
Finance is a volatile industry. Just because you're eating today doesn't mean you're not starving tomorrow. Live a good life, but save for winter.
You're never guaranteed to make it to partner. Almost no one makes it their entire career, especially in PE, without something going off course. The last ~10 years have been wild bull markets, but you are likely to see a 2009 type event at some point in your career.
You're also forgetting compound interest in your calcs of future earnings - every dollar you put into the market now will outperform itself significantly, and that is how you build real wealth. By the time you're at partner level you'll have a family to support, and you won't be saving 50% like you are now as a single guy with no responsibilities.
That said I think 50% + is very high, if you feel like you're just funneling all of your money and not doing well right now, upgrade a bit. You can afford a bit nicer apartment, some nice trips, etc and still save upwards of 30% in a LCOL area.
Depends on how big you wanna ball out. $2000 trip with the homies to Miami? Hell yeah do it. Dropping $10k for a table and bottles? Not a fucking chance.
Many people have already touched on career risk/failure of career assumptions which is one reason. Other reasons are related to health risks and asset risks.
For the first say you get into a major accident and can't work for a few months. You need some savings to be able to tap into during that time. Or even worse, you are disabled and can never work again in PE. You need money to pay for treatments and try to figure out what your next step career wise will be. A bit more realistic example of this is you get a heart attack and decide to exit to corporate finance as a result.
Then you have asset risks. Your condo/home burns down and you lose the amount of several of the uninsured valuables inside. You are forced to find a temporary residence which costs additional money. Inflation rises sharply and the cash you thought would be adequate on hand has suddenly been seriously devalued.
There are a lot of other random scenarios that can occur before you hit the theoretical PE partner that would require savings to get you through. That's why it's important to have savings.
Of course, it's important to strike a balance. Don't drive yourself too paranoid and count pennies given your job (and that frugality could in fact lead to more health problems), but at the same time it's important to make sure you save.
Thanks for the added perspective
If you don’t save when you’re earning peanuts, you won’t save when you’re earning big bucks.
Compound interest
-x
Most importantly, there is absolutely no guarantee you will maintain the same earning power or employment in an industry as volatile as finance.
Additionally, you miss out on the compounding effects by not saving / investing early.
I've been in this industry almost 15 years (analyst straight through) and starting to think about the next adventure. Saving and investing has given me the optionality to do just that. The last thing you want is for your employer to have you by the balls because you need them more than they need you.
It seems like, if someone has the option to walk away, that makes them literally more valuable to their employer and they will have increased bargaining power
Only as valuable for the time it takes to replace them. AKA if it takes 8 months for a bank to hire a competent VP then the current VP is only worth 8 months. I am partially convinced this is how banks have been handling turnover, find enough analyst/associates that will stay aka you just have to keep making your classes slightly larger.
A high net worth finance career is a marathon. Any given year can really wear you down and there's a high likelihood that in any given year, you may search for an easier exit-op with less pay and a better life style.
For this reason, it does not make sense to spend in your analyst years like you're going to be an MD one day. Even if you're dead sure that you can make it, talk to me again after 4 or 5 more brutal years of IB and you're not even a VP yet.
Yep. I came VERY close to quitting a few times as an analyst, associate and junior VP.
I'm honestly amazed I'm still in this profession because the analyst version of me would have been like "no fucking way"
I save like 70-80%. I took rich dad poor dad to heart.
Why do I save???
"At will employment"
If you don't know what that means, learn it now! Otherwise it will be explained to you as HR is handing you an empty cardboard box . . .
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