Prologue: A Few Thoughts Before We Start

Show Chapters

P1 Why bother? Because you are your own family business – and you’re in the business of getting to the peak stage of life

P2 Freedom to live a happy life after full-time work is a gift to ourselves, not a natural right

P3 You need to become an informed consumer of expertise rather than an expert

P4 Will you be rich someday?

P5 Taxes: almost random, with no universal principles

P6 It’s similar with healthcare

P7 Teachable moments and wake-up calls

P8 Per cent

P9 Terminology




Where the route takes us

You may wonder why you should bother with retirement-related stuff at all. Here’s why.


This stage has a lot of overlap with Walk 1 in Life Two.


This is a very powerful notion, one that I have taken from an excellent book[1] that you should refer to if the idea excites you.

When we work, we automatically tend to think of ourselves as employees. That just makes us one of a vast multitude. Think differently. You are also your own family business!

When you start working, your asset is labor. You use this labor to earn money to spend. That’s what enables you to survive, and also to thrive, to be happy; you won’t be happy with no money.

Your labor asset declines over time. In fact, you want it to. You don’t want to have to make it last forever, to use it forever, until you pass away. You want to be able to stop providing it, ideally at a time of your own choosing, ideally at an age when you are still fit and energetic enough to enjoy the spending even more because you now have the time to devote to enjoyment.

In the old days this used to be called retirement. Again, think differently. This is life after full-time work. I use the acronym LAFTWO – which makes me think of it as Life Two. This is freedom! This is the control over our future that we all want.

To enjoy this phase of life, to even make it feasible at all, you have to convert your labor into financial assets. That means you have to save some of it. If you spend all of it, you can’t save any, and that defeats your purpose because you need those financial assets.

Your financial assets grow as you add to them. In fact, they ought to grow much faster than just by adding to them. They ought to grow by investing them. (As we’ll see in Stage F 02, over the long term every dollar you save grows enormously, to something approaching ten dollars.) That means that systematic investing, with a focus on growth, is the main focus of this phase of your family business.

As you spend your financial assets, they will deplete. In this depletion, or drawdown, phase, it’s important to keep them growing, but now it’s also important to bring safety into the equation because your labor has ended and you no longer have the option of adding to your financial assets from labor. And you don’t know how long you have to make your financial assets last, because you don’t know how long you will live. You need to find a way to ensure that you don’t outlive your money. Longevity protection, safety, growth: those become your family’s three financial goals, as you happily enjoy the time that your labor has bought.

Now let me tell you why this is the peak time of life.


Three cheers for Life Two!

Hip-hip … freedom! Hip-hip … time! Hip-hip … happiness!

Yes, Life Two is worth celebrating. It’s potentially the most positive phase of life, the most enjoyable, the most rewarding.


Freedom? You can argue that freedom is never total, but we wouldn’t want it to be. It’s the limits in a civilized society that actually give us greater freedom to pursue what we want to do. Even libertarians stop at red lights, because they know that without traffic rules there would be chaos, and no scope to move forward with confidence.

Life Two reduces our obligations. It’s in that sense that it gives us increased freedom. We ought to take advantage of the increased freedom. We’ve all dreamed of things we’d like to do. Life Two gives us the chance.


Time? We value it because of its scarcity while we’re working. That’s why, during our working careers, we look forward to weekends: fewer work obligations, more time for ourselves. Vacations are even better than weekends: quite simply, they’re longer. And if you’ve been lucky enough to work in an environment that offers sabbaticals (as I was), that’s best of all. People return from sabbaticals with stories of fulfillment, not just those who traveled or did something quite different from the daily routine of their lives; even those who decided to spend their time at home, relaxing or undertaking a project, got satisfaction from finally being able to devote themselves to something they’d put off for lack of time.

Life Two increases the amount of time at our disposal.


Is it possible to have too much of a good thing? Too much freedom, too much time? Yes, of course it’s possible, in a sense. Scarcity is one reason why we rate freedom and time so highly.

But also, we may not want more freedom and time. We may be so comfortable in our work routine that we don’t want it to change. It may be (and for many, it really is) scary to contemplate any change. For many people, “retirement” is something that happens to them, or is done to them, and it takes them aback, it surprises and shocks them. Seeing it happen to someone else should be a wake-up call to us.

We should be ready for Life Two, just as we are for a vacation. We invariably see the positive side of vacations, and anticipate them eagerly, even if we enjoy our work. It should be the same with Life Two. We plan what we want to do on vacation. It should be the same with Life Two.

So I’ll offer guidance on how to think about the future, about who you are, about what you’ll do, about the transition that most people go through, about how to make the most of Life Two.


Finances are always important. Money is one of two resources we have at our disposal, to convert into things that make us happy. That’s why we accumulate it gradually during our working life, to be able to draw on it and convert it to freedom from work obligations. This is when we enjoy the reward for our financial sacrifices earlier in life.

The other spendable resource is, of course, time itself. We don’t accumulate it; exactly the reverse – it’s there, and it gradually expires, whether or not we use it – so it makes sense to use it while we have it.

Together, money and time are the ingredients for happiness – if we spend them well. So I’ll include a stage on how to spend time and money to enhance happiness.


Happiness? Yes, it’s the ultimate goal on this earth. Aristotle reminds us that we choose happiness for its own sake and never as a means to something else; indeed, other things are important because they bring us happiness. The fortunate thing is that our brain chemistry works automatically to make us happiest in this time of life (as you’ll discover in Stage H 02), so we enter this chapter with a built-in advantage.


Put it all together: freedom, time, happiness. This is the BEST of life, for which the rest was made.

That’s why you should bother.



Convert your labor into financial assets.  That’s how you enable yourself to enjoy the peak phase of your life.





Where the route takes us

“Human rights” are really civil and political rights that societies choose to adopt from time to time, rather than rights that have existed for all time in nature.


It’s interesting what each generation takes for granted. The new generation of young ones will take electronics and social media as being like the air they breathe, because they’ve always been around. I was struck by this thought when thinking about “retirement” – something we all take for granted today.

But look around you. No other species on earth, other than human beings, has the luxury of living happily while not working to scratch out day-to-day survival until death occurs. And even with human beings, a hundred years ago the notion of retirement wasn’t exactly a given. Of course, a life of luxury has always been there for the few rich ones. But it’s only our own last three or four generations that have been able to think of stopping full-time work and living happily thereafter as something for all of us, something we should expect, and plan for. We really are lucky, in that regard. That’s why I think of it as a gift rather than a right given to us by nature.

Two kinds of prosperity make the gift possible.

First, there’s the general prosperity of the society we live in. It’s still not in place everywhere on earth, but where there’s general prosperity combined with some social sharing, those societies make a gift of “retirement” to their older citizens.

In some societies it starts earlier than in others. When Bismarck introduced the first government pension in Germany in 1889, it started at age 70. At the time life expectancy at birth was 45, so this was not exactly a long retirement being contemplated. Even in 1935, when Social Security was introduced in the United States, the starting age was 65 and life expectancy at birth was 62. Less than half the population was expected to collect it, and those few for only a few years.

It was only about 60 years ago that societies started to demand a post-work phase of life that would be for most people, and would last more than just a few years, and be almost as comfortable as the working years, but much more leisurely.

In some societies, what is granted is more generous than in others. For example, the US Social Security program started with a limited intention. As President Roosevelt phrased it at the time: “We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”

Today there’s starting to be a focus on intergenerational equity, asking whether we’re awarding ourselves more than is sustainable for our children – but that’s a different question, beyond the scope of this tour. It’s a reminder, though, that we’re the beneficiaries of a gift from our society, a gift that can be reduced or taken away. There’s a famous US Supreme Court case[2] in which it was confirmed that there’s no contractual property right to receive Social Security, and Congress can amend or revise the benefits from time to time. That’s another reminder that it’s a gift.[3]

The second kind of prosperity that makes a gift feasible is personal prosperity, combined with the means to set aside some of that prosperity while we’re working, so that we can have something available for ourselves to draw down, to live on, after we stop working. This becomes a personal gift from ourselves to ourselves, over and above the gift that our society gives us.

Some societies assist this personal process by reducing or deferring taxes for those who demonstrably set aside money for retirement. Much of this tour will focus on the process of saving money, of investing it, and finally of drawing it down to live on after we stop working. But for our purpose it doesn’t matter whether the saving and investing are tax-efficient or not. That’s for a tax expert to advise you about, and I have no such knowledge. Here we’ll look at all your assets in total.

The more you save personally, the more you’ll be able to use the freedom of choice that this phase of life represents.

There’s often actually a third set of arrangements in practice. Techies think of retirement finance as a structure supported by pillars. They identify three pillars in particular.

Pillar 1 is the most general: the post-work arrangements for all members of a society. Think of Social Security in the USA, the state pension in the UK, the Dutch AOW pension, the Canada/Quebec Pension Plans and Old Age Security, age pensions around the world, that sort of thing. Pillar 3 is the most personalized: the post-work arrangements arising from an individual’s own savings. What’s the middle one, Pillar 2? It’s the set of arrangements arising from employment: the workplace pension plans, schemes, funds (names vary around the world) that are established for the benefit of employees of an enterprise or for a connected group of enterprises, like all members of a union or all enterprises in an industry.

The bottom line is that a happy life after work is a gift made in various ways to ourselves, and it’s up to us to use the freedom it gives us.




A happy life after work is a gift made in various ways to ourselves, and it’s up to us to use the freedom it gives us.





This is Walk 3 in Life Two.




Where the route takes us

I’ve come across all sorts of rules about how much money you’ll need for a happy, comfortable retirement. And all sorts of numbers, and all sorts of ways to calculate them. When I saw what colleagues of mine came up with, about what it really means to be rich, I loved the simplicity of their concept.


Wouldn’t it be wonderful to be able to say “I’m rich!” – and mean it? Read on!

In 2011 I was delighted to be invited to write the foreword to a book called Someday Rich by former colleagues of mine, Tim Noonan and Matt Smith.[4]  I recommend the book to you wholeheartedly. The book is addressed to financial professionals, written by veterans in the business of individual financial planning and helping those professionals in two ways:  how to do more sensible things for their clients and how to run an efficient practice. It taught me a lot of things about financial professionals that I didn’t know.

Here’s an extract from my foreword. It deals with two things. First, what does it mean to be rich? And second, how should I interact with my professional?

I think you’ll find it consistent with the “informed consumer” notion that I set out in Stage P3. Here’s the extract.


I’m not an advisor, I’m a client. Of course I want my advisor to be successful; the relationship won’t last otherwise. But what that takes, I don’t know. The authors do, and that’s a big part of this book.

For my part, I start with some questions.

Am I rich? (I use “I” to mean my wife and me together: we’re an indivisible unit.) I like the authors’ definition of rich – it’s not an absolute number, it just means that I’ll have something to leave after I’m gone. If so, my assets will support my lifestyle for as long as I live. And that will be a huge relief to me, and a wonderful achievement. The whole book is based on that as its fundamental premise. Good!

The focal point of the authors’ assessment of richness is based on a measure that technicians have long used in defined benefit pension plans: the funded ratio. First, calculate how much money, how large an asset base, it will take to support the client’s lifestyle. (They show you how.) What proportion of that amount do the client’s actual assets represent? That’s the funded ratio. Above 100% is rich, below 100% requires action. Well, above 100% also requires action, but there’s a clear psychological dividing line between striving for security that you don’t yet have, and buttressing security that already exists.

What’s my role in all of this, as the client? I need to understand myself: my lifestyle, my goals, my psychological make-up, my decision-making quirks, how I am likely to react to good times and bad. I don’t need to know as much as the advisor. I don’t need to be able to create the advice myself; I do need to know enough to assess the advice I’m given, and challenge it. And then, when we agree on a plan and its implementation, I have to share responsibility for its acceptance. This is a partnership.

There’s homework to be done. This book gives me the education and the tools, including fascinating insights into different human temperaments. I don’t just want a good advisor; I also want to be a good client. As far as the relationship is concerned, I’m glad to find that my needs and goals need to be the focal point of the advisor’s advice and actions. I don’t want a conflict of interests. All of that becomes clear.

OK, now I’m ready. Talk to me, discuss with me, plan with me, advise me, implement my plan, monitor progress with me. As Dr Frasier Crane used to say in the TV series Frasier: “I’m listening.”


That’s the extract.

I’ll discuss your personal funded ratio and how to calculate it in some detail on Route 4. For now, all that’s necessary is to note that it’s a rough and quick way to give you an indication of where you stand relative to income security after you retire.



If your assets are enough to support your lifestyle for as long as you live, with something to leave after you’re gone, you’re rich.






These are Walk 15 in Life Two.




Where the route takes us

Life is so busy, there never seems to be enough time or even a good time to think about this stuff. And then suddenly something happens and triggers a connection. Let’s examine teachable moments – and their scarier companions, wake-up calls.


We’re not always ready to learn. There may be opportunities galore, but unless something aligns our minds with learning, we pass them by. We need a teachable moment. What’s that? It’s an opportunity (typically unplanned) when learning about something becomes much easier. It arises when something happens to us, and we think: “Gosh, wouldn’t it be nice if I knew about [whatever]. You know, it’s worth taking the time to find out.”

I’m sure you can imagine some examples of teachable moments. They tend to arise, for example, with changes in our employment: when we’re hired, or when we’re promoted or laid off. They tend to arise in a marriage or a relationship, both at the start and at the end. Becoming a parent often creates a teachable moment. The beginning and end of an educational program; the beginning and end of a home purchase or a mortgage, or a move; a death in the family. All of these are can be sufficiently change-making events in our lives that they trigger thoughts about planning.  And then our minds are more open to learning.

Teachable moments can occur in positive or negative forms. The negative variants are called wake-up calls. They might be events that happen to someone else, and we think, “I’m glad that didn’t happen to me,” or perhaps they happen to us but not in as severe a form as is possible – a sort of narrow miss. Sometimes we think of being tapped on the shoulder by a power above, as a warning to us. Again, at times like these we tend to become more willing to reassess our lives and re-plan, and again we’re open to learning.

I don’t know if a teachable moment prompted you to take this tour. (If so, I hope it was a teachable moment rather than a wake-up call.) And I don’t know what will prompt you to look at particular stages. One perpetual question in connection with long-term planning, such as for life after full-time work, is to wonder how we can create more teachable moments. Can we make annual or quarterly reporting statements so exciting that they prompt you to take action, or at least to reassess your position? Are there road shows that attract your interest? Does tax-filing time cause you to resolve to plan better for next year? How about the turn of the year: does that prompt new year’s resolutions? How about the turn of a decade? Or (as is invariably the case with me) when approaching another round number in your age – somehow that has always prompted a reassessment of my life.

Since we know that wake-up calls are also teachable moments, you’ll notice that some TV commercials attempt to scare you into taking action, typically to buy some product or service that purports to solve the problem that the wake-up call has alerted you to. Equally, though, it’s possible to make education so interesting that it generates a desire to reassess or to take action. (I’ll describe a powerful example in Stage F 04.) But that’s very tough to do.



Life provides natural teachable moments. If those are what prompted you to read this, that’s good. If your own curiosity prompts you to go further, and treat the tour itself as a series of teachable moments, so much the better.




Where the route takes us

If you’re one of the many who don’t understand the meaning of “percent” or what decimals are, don’t be embarrassed, just read on …


It’s a fact that a large proportion of the population doesn’t understand the meaning of “per cent” (frequently spelled as one word, “percent,” or indicated by the symbol %). This is not a reflection of their intelligence or knowledge. I’ve met extremely intelligent and knowledgeable people who simply don’t know what percent means. It’s an important concept in financial planning, so I’m going to explain it here before you even start the tour.

“Per” means “for each.”  You’ve encountered this in many forms.

For example, “mph” means “miles per hour”; it tells you your speed, how many miles you will travel for each hour you travel, if you maintain that speed. Or “kph” for kilometers per hour.

It’s used for quoting prices. For example, flowers may cost $5 per dozen. If you want a dozen flowers, that’ll be $5. If you want two dozen, $10. If you want half a dozen, $2.50. And so on.

“Cent” is short for “a hundred.” It is derived from the same Latin source (“centum”) as “century.” Divide a dollar into 100 pieces, and each is one cent.

So “per cent” means “for each hundred.”

For example, if you are charged interest at 6% a year, it means you have to pay $6 of interest each year for every $100 you borrow. Borrow $200 and you pay $12 in interest. Borrow $50 and you pay $3 in interest. In both borrowing examples, the interest is $6 for each $100, or 6%.

Similarly if your bank credits you with 4% interest a year and you have $250 on deposit, you’ll get $4 on the first $100, another $4 on the second $100 and $2 on the remaining $50, for a total interest payment of $10, in that year.

OK, let’s try another example.

Here’s the first question in a financial literacy quiz[5] offered by the FINRA Investor Education Foundation. (FINRA stands for the Financial Industry Regulatory Authority, in the US.)

“Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have? (A) More than $102 (B) Exactly $102 (C) Less than $102 (D) Don’t know.”

Well, 2 percent a year (as you now know) implies that you’ll get 2 for each 100, every year. So in the first year your $100 will get $2 interest added to it. And that’ll keep happening for five years. So you’ll clearly have more than $102 after five years. Easy, right?

Yet it’s unfortunate how many people can’t get it. To them 2 percent is like 2 units of currency on some foreign planet. Who knows how to translate that into dollars?

You can stop there, and that’s all you’ll need. Skip to decimals.


Or you can take a step further along this path and explore a couple of unusual applications of percentages.

What is 0%? Well, it means zero for each 100. Aha, then it doesn’t matter how many hundreds are involved, the answer has to be zero! Kind of a trick question, going to this extreme.

What about 100%? OK, that’s 100 for each 100 – so it’s the whole thing. 100% of 72 is 72. 100% of 365 is 365. That’s another extreme.

Wait a minute, how about someone who “gives 110% effort” (as we often hear). Well, if you give your all, that’s 100%. So it’s impossible to give 110% effort! 110% effort is just an exaggerated way to say “Wow, what a huge effort!” But it may not be a good idea to correct someone who says they’re giving 110% effort, if you want to keep a friend. Sometimes it’s better to be kind than to be right.

Can you have a negative percentage? Sure. If you invest money and lose 5% of it, it means you have lost 5 of each original 100. So if you started with 300, you’ve lost 15 and you’re now left with 285. That’s often expressed as “earning a return of -5%,” even if it’s not the result you want!


One more notion: decimals.

You may not have heard the expression “place value,” but it’s an important concept that you already understand. If I were to say to you, “Write down the number five thousand and sixteen,” you’d write “5016” (with or without a comma after the 5, it doesn’t matter). The 5 indicates the value 5000 because it’s in the place for thousands; the 0 indicates that there are no hundreds; the 1 indicates that there’s 1 ten; and the 6 indicates that there are 6 ones. You have to put in the zero, even though there are no hundreds, because that place is reserved for hundreds. You put a value in each place. If you left out the zero and just wrote “516” that would be “five hundred and sixteen” rather than “five thousand and sixteen.” So the place in which a number is written signifies what value that number has.

OK, on to decimals. What would be the value of a number written to the right of the ones? Numbers that have one-tenth of the value. We indicate that by inserting a stop (called a “decimal point”) after the place for the ones. (In France they use a comma to indicate a decimal, instead of a stop: it has the same meaning.) And then to the right of that would be the place for numbers with one-hundredth of the value. You come across this all the time, without realizing it. With dollars, the first place after the decimal point indicates dimes and the second place indicates cents. So $1.06 means one whole dollar plus no dimes and 6 cents.

You can indicate percentages in exactly the same way. An interest rate of 1.06% simply means $1.06 for each $100. An interest rate of 0.06% means 6 cents for each $100.

That’s it.



Percentages and decimals are just ways of expressing portions of something bigger.




Where the route takes us

Odds and ends about the phrases I use in specific instances.


Get rid of that word “retirement”!

You’ll notice that I try to refer to “life after full-time work” or “Life Two” rather than retirement. This is deliberate. It’s not just that retirement for many people has a depressing meaning. It’s more fundamental. It’s that retirement used to be a sudden stop at the end of a life-long career, with a short period of expected survival after that. Today it’s much more flexible. It might start earlier, it might not be a full break from work, and it typically lasts for a long time. For all those reasons it’s more like your post-full-time-work life than the old-fashioned concept of retirement. It’s a life, not an end. Banish the word “retirement”! I’ve tried to do so whenever I can.

There does seem to be one language where the word itself conjures up happier thoughts, and that’s Spanish. Their word for retirement is jubilación, and instinctively I think of the English word jubilation. The Spanish word comes from the reflexive verb “se jubilarse” – so does that suggest that it implies “to enjoy oneself”? I don’t know – I hope so!


Your pension pot

What should I call the assets on which we rely for sustenance after work? There’s only one country I’m aware of that gives it a name, and that’s the UK, where it’s called a “pension pot.” So that’s the name I’m using. But with a slight difference, because in the UK that’s the name typically given to the amount in the special tax-favored account used for accumulating retirement assets; but I’m using “pension pot” to refer to all your assets, because ultimately it’s all your assets that can be used to support Life Two, regardless of their tax status.


Your financial professional

Different countries use different phrases for the professionals who help (for a fee, or for a commission, depending on what’s permitted and what’s customary in different countries) or take responsibility for managing your post-work financial arrangements. They might be called investment or wealth or financial planners or advisers or advisors or broker-dealers or whatever. For my purposes, from now on I’ll try to use the generic phrase “financial professional” for them, because regardless of name they ought to be professional, and even if all they’re doing is confined to the investment aspect, for you it’s the overall financial stuff that matters. (Indeed, the psychological stuff matters too, but it it’s far from every professional who helps in that regard.)





We’re not at a destination. We’re at the starting point! It’s time to start the tour!

[1] McCormick (2016)

[2] Flemming vs Nestor, 1960.

[3] Yes, I know this is controversial. Many believe something along the lines of “I’ve paid for it, so I’ve earned it.” All I’m saying here is that, unlike other things you’ve paid for, US law (as well as the law in most countries with what is called a “Pillar 1” pension) says that you don’t have a property right to this pension, a property right meaning broadly that you own it and control it and it can’t be taken away from you. Others might add that the amounts paid and the value of the benefits don’t match; that you’ve undoubtedly paid something, but perhaps not enough to justify the full value of the benefits; but I’m not getting into that issue here.

[4] Noonan et al (2011).

[5] From, accessed on June 22, 2017