The Snowballing Liability of Retirement

Standard debt is a liability that requires constant, monthly cash flows.

So does retirement.

With typical debt, credit agencies view us through the scope of a three digit number system; our credit score. We don’t think about retirement as debt and we don’t need to worry about a poor retirement score impacting our ability to buy a home.

In reality, retirement also needs constant, monthly cash flows.

Otherwise that “debt” grows faster than the interest from other loans. (Unless we’re talking credit cards which are a different story.)

The bottom line is: compound interest works for us and it works against us.

Small investments over time can grow to large amounts, we all have heard this story.

The same rule applies to expenses. As one early retiree put it, “What maintains one vice would bring up two children.”

Optimizing Compounding Interest

In our household, the interest on our loans runs from 3% to 6%. Our bet has been that investments will capture more value and escape the drag from these loans on our overall returns.

2016 highlights how we can benefit on such a bet. We added $15,689 in unrealized gains to our net worth.

Subtracting out $6,841 in interest left us with an extra $170 bucks every week, or $8,848 for the year.

In typical Distilled Dollar fashion, I’ll include a quote from Mr. Munger, “Einstein supposedly murmured ‘Compound interest is the eighth wonder of the world.’ Never interrupt it unnecessarily.”

This same principle applies with maximizing our value.

Once summed up by Mark Twain as, “The man who doesn’t read good books has no advantage over the man who can’t.”

While I love Twain’s version, I find it falls second to a more modern version:

-How is compounding interest working for you?


12 comments… add one
  • [email protected] Mar 13, 2017, 4:34 am

    Totally agree – compound interest can either work for you or against you. Best to try to make sure you’re on the it’s working for you!

    • Distilled Dollar Mar 13, 2017, 11:08 am

      Exactly! We should always be optimizing how much compound interest is working for us while minimizing what’s working against us!

      Plenty of people don’t see the compound growth of what it’ll take to contribute enough to cover retirement. As the years go by, we have less compound interest for our investments to grow!

  • Brad - Mar 13, 2017, 6:30 am

    I never considered it from this angle, but now I have a picture of needed retirement funds as a future “debt” – sort of a reverse debt. I like that image. Will ponder that some more and likely use it during coaching sessions with clients who have a hard time “getting it”. Good stuff.

    • Distilled Dollar Mar 13, 2017, 11:10 am

      Exactly! And that debt will grow exponentially as we near retirement. Better to have our investments benefiting from compound interest than have our future contributions require more funding do to a lack of compound interest!

  • Mrs. Picky Pincher Mar 13, 2017, 8:43 am

    I think this is also a reason that diversifying your FIRE income is so important. You can have a few different side hustles, investment dividends, and rental property income. At least you’re protected more in that case if there’s a market downturn.

    • Distilled Dollar Mar 13, 2017, 11:12 am

      That’s a good point on cash flows in retirement. I agree that the earlier we build up multiple income streams, the better. We don’t want all our eggs in one basket!

  • Millennial Money Mar 13, 2017, 11:37 am

    This is a great point Matt and a great topic for a podcast! Haha. So many elements impacting retirement are uncertain, with the “debt compounding rate” being one of them. I think a lot of people also don’t realize that their retirement savings aren’t all theirs – but that likely 20-40% of it is the governments. The tax rates could be significantly higher in the future, as could any of our monthly expenses. Of course, it’s impossible to predict these scenarios and saving for retirement and expecting your expenses to be the same or even 20-30% more in retirement is probably way off, based on the simple fact that things will cost A LOT more in the future. $50,000 in 30 years won’t buy much – inflation will be astronomical and most of us won’t have saved nearly enough. Thanks for sharing.

    • Distilled Dollar Mar 14, 2017, 6:12 pm

      Hah! Figured you would say that!

      Great points made on future tax liabilities as well. Will be curious to hear more on your take for inflation over the next few years VS the next few decades.

  • Predictable Snowball Mar 13, 2017, 11:56 am

    I love the perspective and looking at retirement as a liability. This is why i focus heavily on predictable passive income because if i can find a way to fund retirement from income my assets/portfolio generate then i can still allow compounding to work for my, not against me. – PS

    • Distilled Dollar Mar 14, 2017, 6:15 pm

      As long as you eliminate the negative drags, then yes! That sounds like a great idea. By multiplying the income streams, we also diversify and set ourselves up to be financially better off. Thanks for the comment!

  • Middleaged Investor Mar 13, 2017, 2:31 pm

    Matt, Great article. This knowledge also falls in line with the practice of “getting some of your own bricks” instead of “flushing rent money” down the tube your whole life. Reminds me of another saying – “The best kind of car is the one that paid for, is only insured for liability, and gets great gas mileage!”

    • Distilled Dollar Mar 14, 2017, 6:16 pm

      Thanks for the comment! I like the “getting some of your own bricks,” line. While I’m not sold buying property is 100% the optimal decision, I do agree for MANY it can be more advantageous to buy vs rent.

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