It Gets Late Early
Retirement planning sits low on the priority list for small business owners. We get to it once the business is healthy. But time isn't on our side.
I visited the Wealthsimple Retirement Calculator this week. It’s meant to “help you understand how much you’ll need to save for your retirement” given your current financial situation and your expectations for your golden years.
The site is well done, and, I assume, as simple as something so numbers heavy and far-into-the-future-looking can be — that is to say, not that simple. (Their Personal Finance 101 section seems more like an after degree than a course.) There are a lot of assumptions and a lot of variables that you can move up and down to forecast your future. It feels like math. Math makes the brain hurt. Yeah, sure enough, brain now hurts. I’ll maybe come back on Mondnesday.
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Then I reminded myself that Wealthsimple is telling Canadians that building Wealth is simple. It’s their name, yeah? I overthink things and I still miss a lot of what happens and why. I reminded myself that bad habits are hard to break and good habits are hard to form. I reminded myself that it gets late early out there. Every decade wonders where the last one went.
So I took a breath, asked Moe for an honest self-assessment, and reopened the Retirement Calculator. I changed a few of the variables and ran a few scenarios. I came away with some insights and some questions.
The forecast is for a life in two acts. In the first act, you work and you accumulate savings. In the second act, you retire and you deplete your savings. Deplete sounds harsh; draw on your savings is better. The shape of the curve in the first act is exponential: the money you save makes you money, and the more money you save, the more money you make. The shape in the second act is linear, a line that takes away everything you’ve built, a line that descends steadily, inexorably to — to what? Zero? That sounds uncomfortably like deplete. Too hard to contemplate. Why so bleak Wealthsimple people? What happens if you’re still around after zero?
Compounding is powerful and weird. Compounding is what powers the ever upward sloping curve in the first part of the Wealthsimple forecast. The idea is that the returns on your investments in one period can be reinvested and generate returns of their own in subsequent periods. And so on and so on. It doesn’t seem like much, but it really is. Let’s say you put away $1,000 and earned $5 of simple interest every year, that is, you get $5 of interest for each year of your investment. In 30 years, you’d have your initial $1,000 plus 30 times $5 of simple interest payments, which works out to $1,150 total. 15% more than what you started with. After 30 years? Meh.
But if that 5% is compound interest, every dollar of interest that you earn can be reinvested to earn interest of its own. After one year, you’d still have $1,005, exactly the same amount as in the simple interest scenario. After 10 years, you’d have $1,629, compared to $1,050 in the simple interest scenario. That’s a sight better. (You might point out that it’s less than $600 more, what can you do with that? Remember that with compound interest, you’ve earned 63% on your original investment after 10 years, compared to just 5% in the simple interest case. To have more dollars, you just need to make a bigger investment. The percentages are what matter.) After 30 years of compound interest, you’d have $4,322, or a 332% return on your original investment. Compared to 15% with 30 years of simple interest. That kind of growth is difficult for most of us non hedge fund managers to grasp. But we don’t necessarily need to grasp the principle in order to harness it and have it work in our favor.
Compounding is most powerful when you invest early. I asked my son, who is in his early twenties, what he knows about investing for retirement. He said start early, don’t stop, and maybe index funds. The Wealthsimple Calculator is basically his plan in motion. It’s remarkable to see the difference that the time variable makes. According to the Calculator, a 25 year old saving $1,000 a month until 65 will have $1.8M in retirement savings. Someone who starts 10 years later, at age 35? They’ll have $982K. How about 45? The $1,000 a month plan to 65 will net $491K. Every 10 years of investing (and compounding returns) roughly doubles the amount of savings available in retirement. On the flip side, starting late, say 10 years late, means you’ve lost half your nest egg. It gets late early.
The curve in the accumulation act slopes upward, slowly at first, but at an ever increasing pace, with each time interval building on a larger base than the interval that came before; so that later time intervals are taking big jumps because they’re generating returns on a much larger base. The biggest contributions to the later base come from the earliest savings installments, the ones that have had the most time to compound. The 25 year old who’s saving to 65 will make nearly as much in the last decade of saving/investing as he did in the first three decades. But only if he did in fact start early and invest regularly.
Saving for retirement means saving regularly for retirement. The Wealthsimple Calculator doesn’t even offer an option for saving sporadically, that is, putting away something only when something is available and not spoken for. “That’s no way to save,” the Calculator seems to be tut-tutting, “you’ll never get there.” So I tried a quick simulation of sporadic saving in Excel. When the commitment and follow through is relatively high, say a 90% chance of setting aside the $1,000 monthly amount in any given month starting at 25 years old and extending over a 40 year horizon, the saver comes up about $200,000 short of the never miss a month scenario (which adds up to roughly $2M in retirement savings). Once the commitment drops to 75%, the saver sacrifices around $500,000. Ouch. The best rule may be that the money for your retirement should be taken off the top and, hence, never made available to your monthly budget. Like it was never there.
Retirement planning often sits low on the priority list for small business owners. We know it’s important; we’ll grow old some day too after all. But things are more unpredictable when you’re running a business as opposed to earning a salary. You’re squarely focused on the here and now. Let’s get to the future once the business is healthy. Or, once the business is flourishing. Yeah, then we’ll have lots of options. But, as we’ve seen from above, time, the biggest difference-making variable in the Wealthsimple Calculator, isn't on our side here.
Which means we have to figure our business out quickly. Is it going to work or isn’t it? Will it make money? Will it generate cash? Enough to support itself? Enough to support the life we want now and our retirement down the road? The years that we tread water or, worse yet, sink can’t be made up in the Retirement Calculator. Those gaps eat away at our future. They can’t be filled, not unless we come up with a compelling product or service that enough customers want and want badly enough to generate profits and cash, and enough of both to allow us to catch up in our investments and savings.
Much of the appeal of entrepreneurship is the journey, the work of starting, building, and growing something of our own. The work is challenging, frightening, and frustrating, and only some times rewarding. A lot of us stick to it because we want it that badly and because we don’t want anything else as badly. This type of singlemindedness is often necessary, but it can also be damaging, to ourselves, to our interests, both present and future.
Darren and I were work neighbors with a couple of young engineers in the early 2010s. They were working on a diagnostic testing device for the health care field. They were bright, motivated, and focused. They wowed investors in pitching events and competitions, and they raised what they needed from an experienced group. They were can’t miss: cutting edge tech, large, deep-pocketed market, great minds for business. One day, they attended a product launch from a large, established player in their space. The presenter mentioned, almost offhand, that the company would soon be launching a device that was nearly identical to their own. Our work neighbors didn’t have IP protection, I’m not sure if it was possible in their specific case.
As one would expect, they were crestfallen. Their investor, a successful entrepreneur himself, told them he still wanted to back them. They could come up with something else. He believed in them as a team. He encouraged them to stay in the startup world, said he was willing to fund their pivot.
Our neighbors thought about it and turned him down. They returned all the funds they’d raised and wound up their corporation. They quickly applied to and were selected by highly competitive MBA programs. They graduated and joined the multinational corporate world — where they’ve flourished. Any financial ground they lost in their unsuccessful bid at entrepreneurship has been made up many times over by their decision to not linger in the startup space once they had nothing worth pursuing. They knew their strengths, and they knew that businesses with vast resources and opportunities valued those strengths. They didn’t need to be entrepreneurs that badly. There were other paths.
The next five years will be like the last five years, unless you decide they won’t. Darren and I have seen a lot of small businesses stall. We’ve experienced it ourselves. Keeping steady in a state where an owner’s expectations are met is maybe OK — although risky, because businesses that don’t grow tend to shrink. But keeping steady in a state where expectations aren’t being met is bad news, all around and constant.
We’ve come to understand owners have to get after it or get out, because it gets late early. Getting out means admitting defeat, sure, but it also means recognizing you have strengths that successful companies with far more resources than you have will value. Getting after it means really figuring out your product or service, focusing on sales, running your business better, becoming a better financial manager, or pivoting.
Andy Warhol said “Being good in business is the most fascinating kind of art. Making money is art and working is art and good business is the best art.” Heck yeah! It’s not all doom and gloom. Small businesses can and do succeed, because small business owners learn and get better at the art of business. There are rewards to justify the risks. Small business owners can stay involved in their businesses, if they choose to, well into their retirement years, no need to dwindle to zero. They can bring their children in and have their business passed on to another generation. They can have enough resources available in their businesses that, when serendipity brings an exciting new opportunity their way, they can take advantage. You’ll have your own idea of success, I’m sure.
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