In business, a sunk cost is a cost that has already been incurred and can’t be recovered. Economists tell us that we shouldn’t factor these costs in when making a rational decision about how to proceed. Since we’re human and hate losses, however, we often use these previous costs as justification to invest more.
The more we invest in something, the harder it becomes to abandon. To change would be to admit that those previous investments were wasted. That’s a tough pill to swallow, so we engage in what economists call a sunk cost fallacy or what psychologists call irrational escalation. You and I might more easily refer to it as throwing good money after bad. Or for my British readers, in for a penny, in for a pound.
Most of the discussion around sunk costs has to do with money, but money isn’t the only metric. Time is another resource we invest. So is effort. We invest those things in relationships, life pursuits, plans for retirement, a career. Sometimes those investments pay off and get us to where we want to be. Other times we realize, if given the chance to do it over, we would have chosen differently. In those cases, just like the business person should not throw good money after bad, we should not throw good life after bad. Or good time after bad. Or good friendship after bad.
The time, energy, effort and emotion we previously put into all those things are sunk costs. We shouldn’t use the fact that we invested badly as an excuse to continue to invest badly. Yes, changing course will force you to admit the mistake. That might cause pain, stress, confrontation or ridicule, but it will be temporary and you will have the opportunity to move forward in the right direction. If you continue in your error, you won’t have the short-term moment of pain as you admit error, but you will have the long-term pain and regret that comes from persisting in your error. Which is worse? The latter, by far.
It’s Monday morning. You’re starting a new week. Maybe you’re heading off to work. Maybe you’re already retired. Either way, be honest with yourself. Is there anything on your calendar this week that you’re doing, not because you want to or because you think it’s the right thing for you and your life, but because you’ve invested a bunch of time/money/life pursuing that path and you don’t want to admit failure? I do. This article is your permission to stop. If not today, someday soon. For today, at least make a decision if not an action. Decide “this is not what I want to do.” And then start figuring out exactly what it is you do want and what needs to change to make that a reality. In short:
- Admit your mistake. Choose temporary over permanent pain.
- Decide what it is you really want out of life.
- Have the courage to pursue that, regardless of what came before.
I’m doing a 3-part series on how to overcome obstacles and achieve the real, significant and lasting change necessary to live the life you want, both now and in retirement. It’s a 3-part series, because we’re covering 3 big ideas. Idea #1 was minimalism: Deciding what doesn’t belong in your life—stuff, expenses, obligations, hassles, commitments, projects—and getting rid of it. Idea #2 is Essentialism: Deciding what IS important and DOES belong in your life and then doing it more often and better. And finally, Idea #3 is Systems and Habits: Taking the essentials from Step 2 and creating systems and habits that make doing those things consistent, automatic and nearly effortless.
For each part of the series, I’ve shared a book that dives deep into the issues at hand. For this final part, I’m sharing two books. The book focused on systems is How to Fail at Almost Everything and Still Win Big by Scott Adams (Quick note: The book presents several powerful ideas, but also a few that are a little wacky). The book focused on habits is The Power of Habit by Charles Duhigg.
Why systems? When you have a system in place, you have a repeatable process that is designed to get a desired result. Apply that to life. If you have certain desired results you want, both now and in retirement, why not create a system that is designed to produce those results?
Why habits? Will Durant once said: “We are what we repeatedly do. Greatness then, is not an act, but a habit.” Once you have the systems in place, you want to make them effortless. You achieve that by doing it over and over until it’s automatic.
Let’s look at systems first. In How to Fail, Adams makes the provocative statement that goals are for losers. If you really want to be successful at something, you should focus on systems instead. He explains:
“For our purposes, let’s say a goal is a specific objective you either achieve or don’t sometime in the future. A system is something you do on a regular basis that increases your odds of happiness in the long run. If you do something every day, it’s a system. If you’re waiting to achieve it someday in the future, it’s a goal.
“Language is messy, and I know some of you are thinking that exercising every day sounds like a goal. The common definition of goals would certainly allow that interpretation. For our purposes, let’s agree that goals are a reach-it-and-be-done situation, whereas a system is something you do on a regular basis with a reasonable expectation that doing so will get you to a better place in your life. Systems have no deadlines, and on any given day you probably can’t tell if they’re moving you in the right direction.”
“My proposition is that if you study people who succeed, you will see that most of them follow systems, not goals…If you know some extra successful people, ask some probing questions about how they got where they did. I think you’ll find a system at the bottom of it all.”
Examples of goals vs. systems
Goal: Lose 20 pounds.
System: Eat right.
Goal: Run a marathon in under 4 hours.
System: Exercise daily.
Goal: Make a million dollars.
System: Be a serial entrepreneur
Examples of successful people who use(d) systems
- Warren Buffett: Investing
- John Wooden: Coaching
- Jeff Bezos: Business
- Michael Phelps: Swimming
- Stephen King: Writing
So here is this idea in a nutshell. If you focus on the goal, you’ll struggle. So focus on the systems—the things you will do day in and day out—that are going to help you achieve the goals. When you do that, the goals become a natural byproduct of using your system.
Yes, the lines are sometimes blurry between goals and systems, but don’t get hung up on it. Again, Scott Adams:
“The systems-versus-goals point of view is burdened by semantics, of course. You might say every system has a goal, however vague. And that would be true to some extent. And you could say that everyone who pursues a goal has some sort of system to get there, whether it is expressed or not. You could word-glue goals and systems together if you chose. All I’m suggesting is that thinking of goals and systems as very different concepts has power.”
So systems have power. I think that’s partly because they give you more at bats. You’re swinging every day. This may produce more strikeouts in the long run, but it will also produce more walks, singles, doubles, triples, and the occasional home run. It also affords you the opportunity to practice, learn, test and refine. What are some other benefits of systems?
- Mindset: According to Adams, “Goal-oriented people exist in a state of continuous pre-success failure at best, and permanent failure at worst if things never work out. Systems people succeed every time they apply their systems, in the sense that they did what they intended to do.”
- Being Proactive: When you do something every day (or regularly), you’re obviously being more proactive. You feel better about something when you’re doing something about it.
- Progress: Systems show more short term progress. Studies show that progress is the most powerful human motivator. When you see progress, you’re motivated to do more and it creates a virtuous feedback loop. Goals, especially big ones, are long term affairs. The finish line is way off in the future. You might never get there. That can cause you to procrastinate, lose focus, get distracted and give up
- Motivation: Again, progress = motivation.
- Automation: Systems help you to automate processes and make them easier.
- Improvement: The practice and repetition involved with systems helps you improve.
- Iteration: You’re constantly learning, so you can integrate that into your system to make it better.
- Energy: When you can celebrate little successes on a regular basis, that boosts your energy and makes you excited about doing more.
- Self-awareness: Research shows that we’re terrible at predicting what will make us happy. Systems help you test your predictions (dreams, plans, goals) so you can get a clear understanding of what you want out of life.
- Structure: Systems give structure to your activities so that you’re focusing your time on the things that will give you the skills, benefits and results that you want.
- Productivity: Systems and structure make you productive. If you know what you’re going to do tomorrow or next week or next month and how you’re going to do it, you’ll get way more done than the person who wakes up and randomly bounces from one task or decision to another.
- Skill acquisition: “I want to travel someday” doesn’t do anything to build your skillset now. “I plan and take one trip each quarter” helps you acquire the skills necessary to become a good traveler.
- Simplicity: With systems, big, complex things (write a book, save $1 million, travel the world, etc.) are broken down into bite sized chunks that seem easier and less intimidating.
- More time doing stuff: Goals are things you achieve later. Systems are things you do today. If you have a goal to travel, you will hopefully do that someday. If you have a system for traveling, you will be doing that today. At a minimum, this gives you more time to enjoy travel (or whatever).
- Focus: A system keeps you focused. It’s a repeatable process that you do day in and day out. It keeps you from getting sidetracked with 100 other things.
Things you should systematize
There are two primary areas where you should implement systems. First, you should have systems for things that you currently do on a regular basis. This could be things like paying your bills, responding to email, eating and exercising. You should have a system for each of those things that helps you to be both efficient and effective.
Personal Example: I used to pay my bills randomly as they arrived using a checkbook and a bunch of stamps. Now I pay my bills once a month in about 10 minutes using online banking. Less time. No stamps. Better system.
Second, you should create systems for things that you want to do. Do you want to lose weight? Save more? Read more? Travel? Don’t just have a goal to do those things someday. Create systems that allow you to do them today.
Personal example: I wanted to lose a little weight, but diets don’t seem to work long term and “Lose 20 pounds in 6 months” doesn’t help me overcome the temptation to stop at Dairy Queen today. So I downloaded the app Way of Life and I had it ask me two questions every day: “Did you overeat today?” and “Did you do something active?” Super simple system with daily accountability. No foods were excluded, I just couldn’t overeat. No specific exercises required. I just had to do something active. Walking around the lake counted just as much as an hour of high intensity weightlifting. Result: I dropped 20 pounds in four months.
Application for retirement
How can you apply this to retirement? Think about the major retirement goals that most people have. Financial independence. Travel. Hobbies. Volunteer work. Relationships. Health. Rather than keeping those as goals that you hope to achieve someday, how could you create systems now so you can start making progress? I don’t want to give you the answer, because what works for me won’t necessarily work for you. So give it a shot. Think about what you want out of life and retirement. How can you change that from a “someday” goal to an action that you’re doing by the end of today?
The Power of Habit
This post is already longer than most, so I’ll try to distill The Power of Habit by Charles Duhigg down to the key idea that will help us turn our systems into habits that are effortless.
How Habits Work
Your brain is always looking for ways to save effort. One way it does this is by “chunking” activities. Simply put, it takes a sequence of actions and converts them into an automatic routine. Duhigg gives the example of backing out of your driveway in the morning. There are perhaps 20 separate actions involved in that process, but you probably do it without giving it any thought because your brain has “chunked” those activities and it does them automatically without even thinking. It becomes a routine. Your brain wants to try to convert pretty much any routine into a habit. It does this in a three-step loop:
- Cue: Step one is a cue that tells your brain to go into automatic mode.
- Routine: Second, there is a particular routine (physical, mental or emotional) that you perform.
- Reward: Finally, there is some sort of reward that helps to tell your brain whether this particular loop is worth remembering in the future and making into a habit.
Here’s an example related to exercise:
Cue: Your alarm goes off.
Routine: You get out of bed, put on your running shoes and go for a run.
Reward: After the run, you make and enjoy your morning coffee.
In this example, your brain soon starts to crave coffee right when the alarm goes off so it goes into automatic mode and completes the routine so it can get the reward. Voila! A habit is born.
How to Create or Change Habits
According to Duhigg, cravings drive habits. If you want to create a new habit think about the routine you want to create and then come up with a cue and a reward. If you want to change an existing habit, keep the cue and the reward the same, but insert a new routine.
Whether creating a new habit or changing an old one, the important thing is to get your brain to crave the reward. The craving drives the habit loop. It outweighs the temptation to skip the routine. When a habit is created, the brain stops fully engaging and the activity happens automatically. Once the habit is formed, you have to actively work to keep it from happening.
Certain habits start a chain reaction in other behaviors. Duhigg calls these Keystone Habits. For example, people who begin a habit of exercise discover that, in addition to exercising, they also naturally start to eat better, sleep better, be more productive at work and feel less stressed. With Keystone Habits, you don’t try to get everything right. You try to get several of the most important things right and the rest starts to fall in place.
Keystone habits can vary from person to person, but here is a list of 11 common (and sometimes surprising) Keystone Habits given by Duhigg:
- Have family dinners
- Make your bed every morning
- Exercise regularly
- Track what you eat
- Get enough sleep
- Save money
- Develop daily routines
- Plan your days
- Cultivate willpower or self-discipline
That’s a wrap!
Well, let’s end things there. We covered 3 big ideas that have the power to completely transform your life. I know because I’ve seen them working in my own life and I’ve heard from many of you who have started to implement them as well. Keep up the good work!
Simplify your life: The More of Less by Joshua Becker
Do more of what matters: Essentialism by Greg McKeown
Make the important things effortless: How to Fail at Almost Everything and Still Win Big by Scott Adams and The Power of Habit by Charles Duhigg
Note: Since I have my own books for sale on Amazon, I am a part of their Amazon Affiliate program. The links above are affiliate links, which simply means that if you buy a book after clicking one of the links, Amazon (at no additional cost to you) will pay me a small commission that I use to help cover the costs of this site. That’s not why I recommend the books, of course, but I wanted to make you aware of it.
Hi all. Life got busy and Part 3 of my series on simplifying your life and executing on the things that are most important to you is taking a bit longer than expected. I know. Ironic isn’t it? Anyway, that post will be up soon. Meanwhile I wanted to give you a few quick thoughts on some recent research related to when we expect to retire vs. when we actually retire.
When do you plan to retire? If you said mid to late 60s, you have a lot of company. Most people plan on working until then. Here are the specifics. According to the latest iteration of the EBRI Retirement Confidence Survey, 75% of people said they expect to work until at least age 65. A full 38% expect to work to age 70 and beyond. When asked why, some gave lifestyle reasons and some gave financial reasons. In other words, for some it’s a choice. They don’t need the money, but they enjoy the challenge, engagement and structure that work provides. For others it’s a necessity. They need the money. The paycheck (and in many cases the healthcare) they earn from working longer is an integral part of their retirement funding strategy.
Do those expectations match up with reality? In a word, no. In addition to tracking when people expect to retire, the EBRI study also tracks when they actually retire. And as you may have guessed by now, most people retire much sooner than expected. The study found that 76% of people retire before age 65 with the median retirement age at 62. Almost 40% retire before age 60 (vs. 9% expected) and a scant 4% work to age 70 and beyond (vs. 38% expected). When asked why, some said they decided they didn’t really want to work after all. Others had a health issue or were the victim of downsizing and were forced to quit sooner than expected.
Regardless of the reasons, when expectations and reality are so far off, it causes problems. It reminds me of something Mark Twain once said: “It ain’t what you don’t know that gets you into trouble. It’s what you know that just ain’t so.”
What if you retire earlier than expected? You’ll need to figure out how to bridge the healthcare gap until you’re eligible for Medicare. You may need to claim Social Security early and take a permanent reduction in benefits. You will need to fund your lifestyle for several years more than expected. You’ll need to find other ways to fill your time, find purpose and get social interaction than heading to the office. Those are some serious issues. So as you plan for retirement, outline what you want and what you expect, but always be asking “What if it doesn’t work out that way?” Have a contingency plan. Be ready to pivot or call an audible if necessary. Then if expectations and reality diverge, you’ll be able to adjust and keep your plans on track.
Have a great week! As I mentioned earlier, Part 3 will be on the way soon. Also, we’re heading to Iceland in a few weeks to do some exploring, so I’ll probably write a post on that that includes some stories as well as some of the tools, tricks and strategies I use for planning trips. Until then, stay intentional and touch base if there’s ever anything I can do to help you.
The headline from a recent study caught my eye: “Majority of retirement plans done ‘in people’s heads’ or not at all.” I think the latter is more likely. Doing a retirement plan in your head is kind of like reciting Pi out to a hundred decimal places or trying to list off all of the Samuel L. Jackson movies from memory—I don’t doubt that there are people who can do it, but most of us would give up if we tried.
Why? Because retirement plans are complicated and have a plethora of moving parts. It’s not just deciding that someday, maybe, depending on how things go, you might just move to the beach. It’s deciding what (specifically) you want to do, what that’s going to cost, and where that money will come from. It’s creating a retirement budget and a distribution strategy. It’s considering things like Social Security, inflation, longevity, sequence risk and dozens of other variables. That’s more than most of us can calculate and keep straight without bringing pencil and paper (and a computer) into the mix. Having a few vague plans in your head won’t cut it. You should have a written retirement plan. Let’s look at how to make one.
Where am I?
A good retirement plan answers three questions. Where am I? Where do I want to be? How am I going to get there? Answering the first question is fairly easy. Just sit down and gather some basic information about how much you have saved for retirement so far. Add up things like your IRA, 401(k), pension, annuities, cash value life insurance, real estate, brokerage accounts and any other assets or income streams (e.g. Social Security) that you plan to use to fund your retirement.
Where do I want to be?
Next, you need to figure out what you want to do in retirement and what those things are going to cost (a.k.a. Where do I want to be?). Your plans will drive your income needs, so you need to have a good idea of when you want to retire, where you want to live and what you want to do. All else being equal, you’ll need more money if you want to retire at 60 in Italy to join the semi-pro bocce ball league than if you want to retire at 70 in Omaha and volunteer at the humane society.
So think like a journalist and ask the who, what, where, when and why of your retirement. If you’re married, go through this exercise with your spouse. Be as specific as possible. For example, don’t just say, “I want to live in California.” Say “I want to rent a 2 bedroom condo in San Diego.” Don’t just say, “I want to get outdoors more.” Say “I want to visit all 59 National Parks.” The more specific you are, the easier it will be to estimate costs.
Which leads me to my next point. Once you have a good idea of what you want to do, you need to figure out what those plans will cost. Ignore inflation for the time being. In other words, if you want to retire at 65 and you’re 55, don’t try to guess what your plans will cost in ten years. Just do some research to figure out what they’d cost today and you can adjust that for inflation later.
To help outline your expenses, you can download my free Retirement Budget Worksheet. Go through line by line and come up with your best estimate for what you think you’ll spend each year in retirement.
Quick note: Some of you may be wondering about things like the 80% rule of thumb. That’s the assumption that many people can get by in retirement on about 80% of their pre-retirement income. In my opinion, having a specific line item budget is preferable to a general rule of thumb because it will give you a more realistic estimate of your costs.
How am I going to get there?
This is where things get tricky. There are so many variables involved with the typical retirement plan that you need to bring some expertise and computer power to bear. If you have the expertise, but just need some help with the calculations, there are a number of online calculators available. A word of warning, however. Many free calculators are very basic and make a number of unrealistic assumptions. To avoid a plan that is “garbage in, garbage out,” be sure to choose a calculator designed to do serious planning.
If you don’t have the time or expertise to do the planning on your own, it’s probably a good idea to hire an adviser who specializes in this type of planning and who has access to sophisticated planning software that factors in taxes, inflation, sequence risk and a host of other variables. A good adviser will also make sure your plan is comprehensive and covers key areas like savings goals, distribution planning, cash flow management, risk management, pension payouts, asset allocation, insurance, Social Security, Medicare, long-term care, debt and more. Finally, if there’s a shortfall between where you are and where you want to be, an adviser can help devise a plan to bridge the gap. There’s obviously a cost associated with hiring an adviser, but you will also likely end up with a plan that is more accurate, realistic and tailor-made for you.
As you can see, there is a lot of work involved in creating a written plan, but it comes with a number of benefits. Done properly, your plan gives context to your financial life. Gone are the days of just saving randomly and hoping it will be enough. With a plan, you can know for sure whether you’re on track to meet your goals. You get clarity and peace of mind. You get financial security. You get on the same page with your spouse. You get a clear vision for the future. I’ve done hundreds of these plans for clients over the years and I’ve never had someone tell me that they regret doing it. The payoff is definitely worth the effort.
Photo Credit: Nick Kelly.
The amount of debt in the world is staggering.
- Auto loans recently passed $1 trillion for the first time and the average car loan is the highest it’s ever been, recently surpassing $30,000.
- Student debt stands at about $1.4 trillion.
- Mortgage debt is about $14 trillion.
- More than 30% of households carry a balance on their credit cards. Those that do have an average balance of $16,000
- The top 2,000 non-financial companies have $6.64 trillion in debt, $2.81 trillion of which they’ve added in the last five years.
- The U.S. public debt has nearly doubled since the 2008 financial crisis, ballooning from $10 trillion to more than $19 trillion.
- 20 years ago China had $500 billion in public and private and debt. Ten years ago that number stood at $3.5 trillion. Today it is more than $35 trillion.
More than the amount of debt, however, is just how much of it has been added since the 2008 financial crisis. After experiencing a debt induced financial Armageddon, you’d think individuals, companies and governments would be hesitant to go down that road again. Not so. Record low rates have fueled trillions (with a “T” like the Titanic) in new debt. It’s like eating until you’re sick at a buffet and then deciding that the next logical step is to grab a new plate and see how many cheese enchiladas and Mini BBQ Brisket sandwiches you can fit on it.
And just like binging at the buffet is likely to end badly, binging on debt will usually end in a combination of regret and real world consequences. How is all this debt affecting us and our ability to reach our retirement goals?
It’s causing stress. A recent survey of adults with student loan debt showed that people would go to some pretty extreme lengths to get rid of that debt. Nearly 57% would take a punch from Mike Tyson. More than 40% would give up a year of life expectancy. Almost 7% said they’d be willing to cut off their own pinky finger. Think about that. A not insignificant percentage of the borrowers polled would be willing to die sooner or hack off body parts if they could turn back time and get out from under their debt. Living with excessive debt is stressful.
It’s making us financially fragile. A recent Federal Reserve survey found that 47% of Americans could not cover an unexpected $400 expense without borrowing or selling something. In other words, half the country is stretched so thin that they couldn’t afford a car repair or a new pair of glasses without some sort of payment plan. There are likely many reasons for this state of affairs, but one is most assuredly debt. In other words, we need to go into debt to fund new purchases because all of our income is already being used to pay for the debts from our old purchases.
It’s limiting our ability to save for retirement. Each year the Employee Benefits Research Institute (EBRI) conducts a Retirement Confidence Survey to see how people are doing when it comes to saving for retirement. In the most recent survey, nearly a third of respondents reported having less than $1,000 saved so far. Two-thirds have less than $50,000 saved. You don’t need to be a financial genius to know that $1,000 is not enough to fund a 20 or 30 year retirement. Even $50,000 would only get you a year or two at best. Why aren’t we saving more? Again, one reason is debt. If most of your current money is being used to pay for past purchases, you won’t have much left over for future savings.
It’s exposing retirees to market risk. Even if you are near retirement and you have no debt, you may still be at risk from debt indirectly. That’s because, with interest rates so low, many retirees have been forced to move further up the risk spectrum to get any sort of yield on their investments. It used to be that you could put your money in a risk-free money market and earn 3%. Now those same investments pay 0%. Super safe bonds don’t yield much better, so many investors are shifting more of their portfolio to lower quality bonds or dividend paying stocks. That works fine while markets are rising, but if we get another debt shock and borrowers can’t repay, then markets could tumble and many investors may find that they took on too much risk in their search for yield.
How much debt is ok?
To be sure, not all debt is bad. Debt can be a useful tool when it’s used to purchase an asset or invest in a project that helps us to generate income and pay back the debt. That said, in order to retire comfortably, the typical person needs to move from a place of low savings and high debt early in their career to a place of high savings and low debt later in their career.
What should that gradual reduction look like? To help people track their progress, researcher Charles Farrell devised a Debt to Income Ratio and then established benchmarks for different age groups. According to Farrell, your debt (e.g. mortgage, car loans, credit cards, etc.) divided by your income should be 1.25 at 40, .75 at 50, .20 at 60 and zero at retirement.
Retiring debt free used to be the rule rather than the exception. Unfortunately, that is no longer the case. In fact, a recent study by the Employee Benefits Research Institute showed that 65 percent of American families with a head of household age 65-74 had debt. The age group with one of the biggest spikes in debt was 75 and older.
That’s troubling because debt adds risk and reduces cash flow, two things that can derail your retirement. It is inherently limiting at a time when most hope for greater independence and opportunity. It increases uncertainty at a time when most people want security. So make a plan to gradually eliminate your debt and you will greatly increase your odds of having freedom, flexibility and peace of mind during retirement.