Wins and Losses Series: Michael from Your Money Geek – “I decided to dump the 4% rule”

Wins and Losses Series: Michael From Your Money Geek - "I Dumped the 4% Rule"

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Hi, Team!

 

Welcome to another edition of MikedUp Blog’s Wins and Losses Series, where we interview a generous participant about 4 of the best and worst moments of their life. The point? To learn from the past so that we can improve in the future!

 

If you’re interested in participating in the Wins and Losses Series, please send me a note here (you don’t have to be a blogger to participate!).

 

(Photo courtesy of MKulp Photography)

 

This week’s participant is: Michael Dinich from Your Money Geek

 

Michael didn’t hold back with the wisdom this week! I’m stoked to see what you readers have to say about this one! Take it away, Michael:

 


 

Hello MikedUp Blog readers!

 

I’m Michael, and I blog at Your Money Geek providing tips on how to make money and save more of it while also sharing inspirational success stories from others.When Mike proposed the idea of sharing peoples’ money wins and losses I immediately knew he had a hit.

 

Having worked in the personal finance space for nearly 20 years, I’ve learned many things. One that stands out is professionals in the personal finance space seldom share their losses. I suspect it’s due to some combination of ego, pride, and a fear of not being seen as an expert if they admit imperfection.

 

I’ll share both. But I’m starting with my wins, so you don’t think I am a complete goof.

 

Winning

 

They say breaking up is hard to do, but I disagree. I was in a lousy relationship, and after several years of abuse, I finally called it quits. That’s right; I decided to dump the 4 percent rule.

 

Working in personal finance, I saw firsthand what the 4 percent rule was doing to people years ago. Retirees I met in 2001 were panicking they would run out of money. They were literally staying up at night with the fear of spending their money.

 

The prevailing wisdom was by staying in the markets long enough, being diversified, and only withdrawing 4% percent (adjusted for inflation), your money would be okay. However, many who retired before 2000 struggled between 2000 and 2010.

 

I recall meeting with retirees in 2009, who retired ten years earlier with a million dollars, already below $400K. In a decade, they had spent (and lost?) more than half a million dollars they’d saved for their retirement years!

 

Looking in from the outside, I began questioning the status quo.What’s the point of saving money if you can only withdraw 4% of your savings as income? Making matters worse, the 4 percent rule doesn’t even guarantee you won’t outlive your money. It didn’t take me long to realize I didn’t want to spend my retirement sitting up at night worrying if I’d run out of money.

 

This epiphany led me to two conclusions:

 

1) The money I save will be kept in safe investments – I’m perfectly happy earning slightly lower rates of return in exchange for knowing my principal and gains are safe.I have nothing to prove. If I can get decent returns without worrying, paying a fee for peace of mind doesn’t fill me with regret or keep me awake at night. Should the market never decline again, I won’t mourn the cost of protection either.

 

2) Saving money to generate income to purchase products and services you need to survive is often inefficient.

 

Let’s say your electric and heating bills are $5K a year. How much money do you need to produce $5K a year using the 4% rule? You might answer $125K. However, the real answer is higher. Because of taxes, you may need to produce $6K – 7K a year just to keep the lights on and the heat running.

 

Now, think about how difficult it is to save $125K or more. How hard do you need to work to save that much? Taxes must get paid while you’re working and going to work isn’t free.You need gas, vehicles, clothing, and of course time (time is money as they say). It may cost you $200K or more to save $125k.

 

Only to pay for lights and heat!

 

It gets abstract quickly

 

All I can say is I’m not going to work years of my life just to keep the lights on. For a fraction of that price, I can install solar panels and never have a light or heat bill again.

 

Ultimately, this has led me to a conclusion; self-sufficiency is the fastest path to financial independence. Every product and good I can produce on my own property represents income I don’t need to create and capital I don’t have to go out and earn, pay taxes on, and ultimately save.

 

Not every decision is an economic one. Sometimes we do things for the overall quality of life. For me, I would rather keep my money safe and use side hustles and self-sufficiency to enhance my returns.

 

And the Losing

 

In reflection, there are always moments where you think you should have done something differently. I tend not to dwell on those moments but use them as learning experiences.

 

Looking back, I wish I stood up for myself.

 

We were having some concrete work done, and the contractor knew I worked in personal finance. He shared with me that his son (who worked for him) was having trouble obtaining a mortgage for a home he was trying to purchase. The contractor suggested that if I could help his son get a mortgage with favorable terms, he would reduce the cost of the concrete work.

 

I love bartering, so I jumped at the opportunity. I immediately went to work determined to help his son get a mortgage. But securing this mortgage wasn’t simple. His son had plenty of hurdles to clear.

 

Jumping Through Hoops

 

First, we had to determine what was preventing him from obtaining a mortgage. We began pulling credit reports to see what was harming his chances. He had a few negative issues hurting his score that needed fixing. Credit agencies don’t typically move quickly but I’ve learned a few tricks over the years, and we used them all!

 

Potential lenders required documentation of income. The son and father were partners in the business, and their record keeping left much to be desired. Luckily, we had an accountant who was able to decipher their shoebox filing system of crumpled concrete-stained receipts and create profit and loss statements to satisfy the bankers.

 

Once the basics were sorted out, we worked with the bank and the sellers of the house to get everything else in order. He had applied for an FHA loan which required the seller to make some updates to the property. For the better part of two weeks, I was regularly going between the bankers, the son, the realtor, and the accountant to get things in order.

 

We worked overtime to get this young man approved for a mortgage at great terms, and we succeeded.

 

One day before closing, I received a phone call from the son saying he no longer wanted the house. I can’t even recall the excuse he gave. The reality was he either changed his mind or got cold feet. And either way, two weeks of work were wasted.

 

Feeling Stuck

 

Despite having done my part of the agreed-upon work, when the contractor presented his bill he expected full price. Adding insult to injury, the construction project was not even completed to my specifications. However, I felt stuck.

 

I was young and owned a business in a small town where everyone knows everyone else’s business. In hindsight, I should have complained and refused to pay until the job met my approval. But trying to avoid a feud with a local business owner who was generally respected in our community, I regrettably caved and paid the bill.

 

Thinking back, I made two mistakes:

  • I failed to have a proper contract drawn up with the contractor specifying precisely what concrete work would be completed, including the specs of the project and the price.
  • I had nothing in writing to protect myself regarding the discount on the concrete work when the son decided not to go through with the closing.

 

But I learned my lesson

 

Whenever I hire out work, I have lengthy contracts drawn up, listing out the project in detail. This saved me a few years later when another contractor failed to deliver on a project he was hired to perform. Luckily, I had impeccable records and was able to recover my funds and associated costs.

 

Now that I’m thinking about it, I might break up with contractors too!

 


 

Reader’s Input

 

I absolutely love learning from people that have been through similar real-world experiences. Michael is 100% that experienced guy with plenty of wisdom to share. I really enjoyed how he took his losses and explained the lessons learned. What are your thoughts? Have you been through similar situations – and if so, what did you learn from them? Let us know in the comments below!

 

Thanks for reading!

 

If you’re interested in discovering a better version of yourself – whether with fitness, finance, or family – then subscribe below to MikedUp Blog’s FREE newsletter and let’s improve together!

 

I’m glad you’re here. Thanks again and talk soon!

 

– Mike
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7 Comments

  1. Really hit home on this one. Michael uses his knowledge & experience to try & help someone else only to be let down. He has a great attitude, you can’t let it set you back. Take the lesson learned & move on, you become the better person for it, stronger than before. He has a clear conscience, unlike the contractor he trusted at his word.

    1. I hav never liked the 4% rule. First I don’t just automatically adjust anything for inflation, I look at my expenses for the prior year and use that as a gauge on where to go the following year. What allocation do you suggest to stocks for retirees over 60? Most will not have side hustles is my guess. I am looking at 20-30% in stocks and the rest in bonds or CD ladders. I may up t percentage in equities when my wife begins receiving Social Security at age 70, 7 years.

    2. Susan – Thanks so much for your comment and for stopping by! I’m glad to hear this one struck a cord with you. Michael does a great job and the thing I love about his posts is that I’m always learning something new. He’s a good dude – just got burned and had to adjust course moving forward. I appreciate your comment!

  2. Mark

    I’m not a fan of bonds in a portfolio; I find they drag down returns too much when times are good, while ironically not providing enough protection when times are bad.

    I know I’m in a minority position but I instead just uses annuities as a bond alternative. Then use options to replace equities. This approach can beat most stock/bond blends, both with higher upside potential and better risk management.

  3. When I first saw that you are dropping the 4% rule, I almost dropped the water glass I was holding. However, as I read more, I understand what you meant. Phew!

    This is an interesting perspective. I have never factored the cost savings of producing things myself to save money. Last time I did the calculations on Solar panels, it would take like 20 years to realize the cost back. On the longer run you may be right.

    I do enjoy learning about different perspectives.

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