Abundance: the Intersection of Philosophy and Finance

     Like many Americans whose teenage years coincided with the heyday of shopping malls, I gained access to the working world through the greasy portal of a fast food establishment.  I won't use the word "restaurant," as it would only misrepresent, in euphemistic terms, what amounted to a tawdry burger shack.  For the grand sum of $3.35 an hour, I helped maintain both the operation's culinary components and infrastructure, cleaning tables, sweeping floors, and traipsing trash.  In this capacity, mired in sweaty servitude, I experienced the nihilistic frustration that comes from trading hours for dollars.  The frustration turned bitter when Christine K., a high school classmate for whom I nurtured a well-advertised crush, feigned ignorance of our acquaintance, disdaining me and my greasy greeting as she arrived for a snack with her status-conscious friends.  My teenage spirit, ever hopeful amid hopelessness, found in these travails a silver lining.  If I could only save a sizeable chunk of my earnings, I might salvage a thread of dignity from the tattered fabric of my ego.  With enough savings--a teenage version of F-U money--I could quit the burger stand, hopefully in a moment of teen triumph that, I fantasized, might endear me to Christine K., if not her stuck-up friends.

     For all its unpleasantry, the burger stand did impart to my teenage brain an important life lesson.  The frustration of trading hours for dollars prompted me to think critically about spending habits and the chief liability that drained my funds:  my '68 T-bird.  A prime specimen of the heavy-metal mojo that once characterized American car culture, the beast had an unquenchable thirst for gas an an affinity for the repair shop, traits that an objective cost-benefit analysis identified as busters to a balance sheet.  Either I had to ditch the car or work longer hours, a devil's bargain that my teenage heart found most unpleasant.  In sum, the burger stand confronted me with one of money's fundamental truths: saving requires sacrifice.  Eventually, I quit the burger stand, but I never quit the savings mentality it helped instill.

     A long journey separates the development of a savings mentality from financial abundance, but as Rancroft Beachley reminds us in his new book, CA$H CRAFT:  The Musings and Meditations of an Income Investor, they represent mutually informing money milestones, or as Mr. Beachley might pen, "flipsides of the same investing coin."  (Full disclosure: deluded that my background as an English teacher qualifies me to opine on bookish matters, Rancroft solicited my services as manuscript editor. Plugging his book thus indirectly toots my own horn, and I excerpted the opening paragraphs of this post from the book's foreword.)  But just what does "financial abundance" mean?  This question and several others guide the curious, enigmatic, and ultimately fascinating meditations that comprise CA$H CRAFT, a book that merges finance and philosophy in an unconventional way.  Frankly, neither the investing nor the personal finance categories offer anything like it.  I know this not because of my experience with income investing--a topic which Rancroft's manuscript revealed as nuanced beyond my expectation--but because my editing effort required me, I felt, to gain familiarity with titles from the investing and personal finance genres.

     A refreshing quality of CA$H CRAFT is the irreverent critique that the author applies to the presumptions of personal finance.  He has little tolerance for blogosphere buzzwords, which he regards more as marketing gimmicks than useful ideas.  Case in point, the aforementioned financial abundance, an idea that inspires an almost mystical vocabulary in personal finance literature.  Beachley's effort to define "abundance" according to specific metrics gives a taste of the explorations that readers will encounter in CA$H CRAFT.  I excerpt the following passage (moderately abridged) with permission of the author.  

From Meditation 3, "On Financial Abundance," by Rancroft Beachley

A clever vocabulary, promoted by lifestyle coaches and finance gurus, now pervades the internet.  Where past generations offered the unpleasant yet effective admonition that riches require hard work and savings, today’s money muses invite their audience to “win the money game” by “shifting frequencies.”  If we accept the metaphor their vocabulary promotes, we can believe that wealth, like sunshine, radiates with widespread resplendence; we need only adopt an “abundance mindset” to enjoy it.

     If seekers of wealth needed only a proper money mind to achieve their goal, the world would abound in millionaires.  Instead, less than 1% of the world’s population controls assets of one million or greater.  95% of the world’s adults, and 75% of U.S. households, never achieve wealth greater than $350,000.  In their eagerness to promote the money mind, today’s finance gurus rarely discuss the Pecuniary Paradox:  in a world of abundant wealth, there remains a scarcity of wealthy.

     The word “abundance” implies a grandeur that affects us emotionally.  We imagine money in such quantities that it functions like the air, flowing through our bank accounts the way breath flows through our lungs, independent of conscious effort on our own.  As an income investor whose assets produce significant monthly cash flow, I admit the comparison has merit.  However, even though my dividends roll in automatically, I remain conscious of my spending, knowing the role budget-mindedness played in enabling me to attain HNW (high net-worth) status. 

     Yet if the word “abundance” over-reaches in its implications, it nevertheless provides a useful reference, denoting a state of wealth much greater than that suggested by mere “sufficiency.”  On the spectrum of retirement lifestyles, it occupies a place well opposite that of “leanFIRE,” the designation of financial freedom in its most basic form, where wealth generates income sufficient for life’s bare necessities —food, shelter, inexpensive hobbies, and perhaps an occasional social indulgence.    

The Metrics of Financial Limitation

     For the income investor seeking to build a retirement portfolio, financial abundance provides an aspirational guidepost, denoting a lifestyle much more robust than that of the retiree who merely “gets by.”  In order to properly orient our aspirations, we should ponder what it means to “get by.”  Even for most people whose wealth extends solidly into six-figures, a confident retirement happens late in life and depends upon substantial infusions from social security.  The typical monthly retirement income, according to 2017 data, hardly exceeds $2,600.  Annualized, this amounts to only $31,200, about double the 2017 Federal Poverty Guidelines for a family of two.  In fact, it approximates the income of someone working full-time at sixteen dollars an hour.  If any sales associates, customer service reps, or office clerks relish the prospect of a retirement lifestyle based on the income from a $16 per hour full-time job, I invite them to spend a month in a major American metropolis, which will quickly convince them that the average retirement income provides a below average lifestyle. In Southern California, where I live, this amount barely entitles the recipient to survive, let alone thrive.  A couple can easily spend 3K per month just on housing and groceries. Home ownership might reduce, but not eliminate, the cost.  Property taxes, insurance, upkeep, community association fees and utilities ensure that those without mortgages still face substantial housing-related expenses.  Add healthcare, transportation, plus an occasional entertainment or social activity, and the average retirement income quickly loses its luster.

     Of course, the world’s pattern of relative wealth translates to relative costs, and the budget that means subsistence in Los Angeles, New York, or San Francisco might provide happy existence in Las Cruces, New River, or San Jacinto.  Geographic arbitrage provides a time-honored enhancement to the lifestyles of America’s retirees, allowing them to stretch pensions and social security payments inadequate for high-cost locales.  Promoted in recent years as a “lifestyle hack” by early retirement bloggers, the term hints positively about the joys available to ordinary Americans who relocate to Thailand, or an RV, or perhaps a cabin “off the grid,” where federal poverty guidelines presumably don’t apply.  

     Exhortations conveyed in print lose much of their dramatic effect, particularly if the sentiments so expressed pose a challenge to cherished notions.  The investor who quests for leanFIRE, and who finds in these pages a critique of leanFIRE philosophy, will likely raise a shield of counter arguments against Cash Craft ideas of abundance.  If, aged thirty to forty, the leanFIRE aficionado already holds the resources—a portfolio, say, of $500,000—necessary to make leanFIRE dreams a reality, then the shield may come burnished with pride.  Blessed with good health and the optimism of self-confidence, a person aged thirty-something may well regard $500,000 as “F-U money,” a ticket to a life untainted by the constraints of the cubicle. 

     The wisdom of hindsight gives me a perspective that I hope the F-U money-minded will pause to consider.  Viewed from the Realm of Seven Figures, 500K represents less a ticket to paradise than a fork in the road.  On one hand, it opens the door to sustainable (albeit frugal) adventure away from the rat race.  On the other hand, for those who remain in the race, it opens the door to more robust cash flow.  Choosing the latter path, I doubled my 500K to a million dollars in just under seven years.  Along the way, I stopped thinking in terms of F-U money and more in terms of money momentum, a benefit I could gain by embracing the system rather than dismissing it.  In time, the sum I initially considered F-U money looked more like false summit, an achievement worthy of note but whose chief value lay in its position as a vista point on the road to higher attainments.

     To their credit, many advocates of leanFIRE recognize the opportunity cost inherent in their quest and offer a philosophical perspective to make that cost more palatable.  Quitting the cubicle, they contend, doesn’t mean an end to work.  Rather, it means an opportunity to work on terms agreeable to oneself.

 

Case History:  F-U Money Mistakes

     Debbie and Marlon, a thirty-something couple who maintained  a casual association with the investment club, provide a case history for work-optional living.  An attorney with a downtown firm, Marlon voiced frustration with eighty-hour weeks and office politics, a frustration that bred resentment when the firm refused to grant him partner status.  At that point, the couple unveiled their F-U money—about $450,000 in mutual funds and real estate equity—which they liquidated to fund their escape.  After purchasing a used RV, Marlon deployed the remainder of their assets into an income portfolio that produced about $2,000 per month—enough, they figured, to fund years of nomadic RVing.  If they needed additional cash, Marlon assumed he could do freelance legal consulting online and Debbie could follow her passion of writing travel articles.

     My investment club mentors criticized the plan’s opportunity cost, noting how the combination of the couple’s net worth and Marlon’s six-figure salary needed only a little time to produce powerful synergies.  Undeterred, the couple embarked on their plan, and for a while sent club members a glowing correspondence, replete with pictures of famous locales, intriguing landscapes, and acquaintances met on the RV trail.  Then, the correspondence ceased, leaving the couple’s status a mystery. 

     Some years later, entirely by chance, I encountered Marlon at a gas station in West Los Angeles.  Though evasive at first, Marlon confided that he and Debbie had split; unable to fund leanFIRE on his share of the net worth pie, he had returned to “the gripes of the grid.”  Unfortunately, his time away from the legal grind set him back professionally, and he found himself scrambling to earn half his former income.   Since my own portfolio had by that time swelled to nearly a million dollars and produced over $4,000 in monthly cash flow, I remained circumspect about the difference a handful of years made in our finances, lest Marlon see me as an unpleasant reminder of an alternative road.    

     I have no doubt that for every story like Marlon’s, another awaits telling, one whose protagonist successfully converts F-U money into years of leanFIRE inspiration.  From a portfolio perspective, I take issue not with the possibility of leanFIRE success, but rather the opportunity cost that work-optional living can’t sugar-coat. Though exhortations conveyed in print may lose their dramatic flair, I wonder what exhortations Marlon might invoke, if only he could mail a letter to his younger self.  With hindsight, the money that he invoked as a middle-finger gesture to the system proved less meaningful than hoped.

The Metrics of Comfort and Affordability

     If we want a budget that allows us to do more than “get by,” or that doesn’t force us to employ “lifestyle hacks” to conjure financial freedom from the equivalent of an office clerk’s salary, we must climb further up the wealth pyramid, into regions occupied by the global top 1%, where the minimum requirement for admission entails wealth ten times greater than the median U.S household.  An address in the top 1% means more than a nice view of the wealth pyramid.  Financial planners recommend a nest egg equivalent to ten times a worker’s final salary at retirement age.  Applying this recommendation to the average U.S. household, whose annual income averages roughly $75,000, we find that a 750K nest egg—in theory—represents the gateway to a comfortable retirement.  With inputs from social security averaging $1,300 per month, the retiree with $750,000 comes close to absorbing the $56,000 annual cash burn of the typical U.S. household.  If he/she has the benefit of a nest egg invested for cash flow, the $56,000 yearly budget comes easily within range:  $15,600 from social security, plus $40,400 from investment income, an easily attainable 5.4% yield on a 750K portfolio.

     A simple premise underlies the assertion that a budget of $56,000 represents the threshold of a comfortable retirement.  This number denotes the annual expenses of a typical American household and, by implication, buys a standard of living most Americans find comfortable.  With a $4,660 monthly expenditure, the budget supports a lifestyle three-and-a-half times better than the Federal Poverty Guidelines for a family of two and equates very closely to the monthly take home pay of a worker earning $38 dollars per hour. 

     Let’s put it bluntly:  if your income through passive sources lets you buy what most Americans seek through sweat, debt, and a paycheck-to-paycheck existence, you occupy an admirable place in the wealth pyramid. But, it’s still not financial abundance.

     Some investors may express surprise upon learning that a person could amass wealth greater than 99% of the world’s adults and yet still fall short of financial abundance. In part the surprise stems from consumer culture psychology, which conditions people to regard money not as capital but as a ticket to a shopping spree.  The materialist mind pictures a million dollars and dreams of pleasures the sum might purchase.  Sadly, the materialist mind often learns too late one of wealth’s subtle truths:  having the money to purchase an item doesn’t necessarily make that thing affordable.  To understand why, we must view affordability not by sticker price, but by the concept of “permanent capital equivalence”—the amount of capital required to purchase an item from dividends alone.

     Consider the coffee achiever whose typical weekday morning includes a Starbuck’s latte, a habit that costs $100 per month to satisfy.  Though this amount may not seem burdensome—particularly when viewed piecemeal as a $3 daily expense—the cost changes dramatically when displayed in terms of its permanent capital equivalence.  The capital required to sustainably generate $100 per month ($1,200 annually), if invested at the 6% yield typical of my portfolio, comes to about 20K.  For most people, the ability to perceive a $100 per month coffee habit in terms of its 20K permanent capital equivalence requires a shift in thinking so extreme as to comprise an uncomfortable disruption of world view. 

     My investment club colleagues found the concept of permanent capital equivalence so intriguing that they made it a recurring topic of conversation.  A club member in possession of a new car, garment, watch, or other accessory often came under immediate scrutiny as debate ensued over the true cost of the purchase. These debates provided an unusual perspective, rarely prevalent among the less money-minded, about the esoteric accounting by which savvy income investors understand the world. 

     Of course, sometimes items of limited utility count as necessities.  Unfortunately, in our culture of money-worship, most consumers succumb to messages that cloud the difference between necessity and the merely nice.  When people incur debt to purchase limited-utility non-durable items, the hidden costs balloon.   The human preference for instant gratification, combined with the pressure to consume, ensures that only a small minority of workers find the patience and discipline necessary to make assets the means by which they afford indulgence.  This, as much as anything, explains how in a world of abundant wealth, there remains a scarcity of wealthy.

 

The Metrics of Financial Abundance

      The Pecuniary Paradox suggests a minimum threshold for the attainment of financial abundance.  The fact that a small number of people control the majority of the world’s wealth implies that the numbers associated with financial abundance comprise a domain of exclusivity.  By definition, any numbers associated with the average—in wealth, income, or expenditure—don’t qualify.  Yet wealth exists on a continuum, and the numbers associated with average provide a basis from which we can extrapolate the minimum necessary for abundance. 

     The number thus derived will seem laughably low to the Wealth Pyramid’s penthouse dwellers, yet still represent an amount so far beyond the reach of most people as to represent a fantasy.  If $32,000, two-times the Federal Poverty Guidelines, means “getting by,” and $56,000, a budget 75% greater (and 3.5 times the poverty guideline) means “comfort,” we can reasonably posit that a budget 75% greater still, or 6.1 times the Federal Poverty Guidelines, means financial abundance for a family of two.  These proportions suggest an annual budget of roughly $100,000 as a minimum threshold, a number, coincidentally, very close to the $102,000 that a recent Pew Research Center study, cited by CNBC in 2017, lists as the minimum required to qualify a family of two as upper income.  If, from investments alone, an investor sustainably generates income to cover a 100K annual budget, he/she has financial abundance. 

     Critics who disparage this sum should remember that, due to the different tax treatments of investment income vs. earned income, 100K of dividends roughly equates to the take-home proceeds of a $150,00 salary.  I venture that most early retirees, during their working years, would have found a $150,000 salary quite satisfactory.     

   Very few workers, even those lucky enough to enjoy increasingly rare defined benefit pension plans that provide a promise of substantial salary replacement, can realistically anticipate financial abundance on such terms.  The six-figure retirement income, if mentioned in personal finance literature, usually appears as an idealized salary replacement for a target audience advised to work until age seventy in order to maximize social security payouts and IRA distributions.  Building such a passive income stream in middle age, without the benefit of inheritance, lottery, or other randomly received capital infusion, merits tremendous acclaim.  To reference the wisdom of 17^th Century Dutch philosopher Baruch Spinoza, “all things excellent are as difficult as they are rare.”  So with financial abundance. 

     Savvy income investors who retain a robust cash reserve and build a portfolio with core assets yielding an average of 6%-7% range will need roughly 1.5 to 2 million dollars to qualify for this minimum threshold of financial abundance.  Those willing to embrace more volatility might supercharge their portfolios with closed-end funds, whose 8%-9%+ yields make the minimum threshold attainable with assets in the 1.4-1.6 million-dollar range.  My own portfolio, which tilts toward a more conservative 6% overall yield, achieves financial abundance with roughly two million dollars of assets and net worth equivalence, where “net-worth equivalence” refers to the capital conversion value of a $3,500 per month pension with 2% annual COLA.

    

Abundance—the Intersection of Philosophy and Finance

     Defining financial abundance in specific terms helps untangle the topic from the slick slogans that seem psychologically compelling but offer little in the way of substantive guidance. I recognize, however, that wealth remains a relativistic concept. An attempt to define financial abundance according to specific dollar quantities may invite criticisms of lifestyle bias.  In a relative world—assuming one has enough money to provide for basic needs—who can say objectively that happiness exists in some lifestyle circumstances but not others? 

     An objective inquiry based on references to the wealth pyramid, income levels, and budgets may ultimately matter less to the aspiring retiree than a subjective inquiry about how to best use that most precious of resources—time—which independent wealth, at any level, makes available.  Here, where finance intrudes on philosophy, we must acknowledge that even a lifestyle distinguished by its satisfaction of wants has limitations.  While the range of human desire extends to infinity, the ability of money to satisfy human desire remains constrained.  Some people may want to have a picnic on the moon, and a certain few even possess the resources to do so.  However, to indulge the craving on a frequent basis would deplete the wealth of even the wealthiest.

     Financial abundance may offer escape from certain aspects of the human condition, but it doesn’t help us escape being human.  In Rasselas, Samuel Johnson tells the story of an Abyssinian prince who left his luxurious valley in search of happiness.  “I fly from pleasure,” Rasselas tells a sage, “because pleasure has ceased to please.”  After many adventures he returns, convinced of the futility of finding happiness within the sphere of human experience.  While Rasselas provides a cautionary tale to those who think riches offer a panacea for Earthly troubles, his example also shows that riches confer a key benefit:  time freedom.  Ironically, Rasselas’ unique position within the range of human circumstance afforded him the rare chance to fully explore the unpleasantry of being human.  Financial abundance may not assure the satisfaction of all wants, nor can it assure happiness—yet it does confer that rarest of gifts:  complete ownership of one’s time.

--(CA$H CRAFT:  The Musings and Meditations of an Income Investor is available on Amazon in both paperback and e-book format.)